Dover Company began operations in 2010 and determined its ending inventory at cost and at lower of cost or market at December 31, 2010, and December 31, 2011. This information is presented below.
Cost Lower-of-Cost-or-Market
12/31/10 $480,940 $454,530
12/31/11 $569,900 $549,050
(a) Prepare the journal entries required at December 31, 2010, and Decemeber 31, 2011, assuming that the inventory is recorded at market, and a perpetual inventory system (direct method) is used.
(b) Prepare journal entries required at December 31, 2010, and December 31, 2011, assuming that the inventory is recorded at cost and an allowance account is adjusted at each year-end under a perpetual system.
(c) Which of the two methods above provides the higher net income in each year?