Response to the following problem:
Lower of Cost or Market
The inventory records of the Frost Company for the years 2010 and 2011 reveal the cost and market of the January 1, 2010 inventory to be $125,000. On December 31, 2010 the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2011 market value of inventory was $140,000, and the cost was only $135,000. The Frost Company uses a periodic inventory system. Purchases for 2010 were $100,000 and for 2011 were $110,000
Required
1. Prepare the journal entries at the end of 2010 and 2011 to record the lower of cost or market under the (a) allowance method, and (b) direct method.
2. Prepare the cost of goods sold section of the income statement and show how the company would record the inventory on its balance sheet for 2010 and 2011 under the (a) allowance method, and (b) direct method.