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 $359,840 $340,080
12/31/11 426,400 410,800
(a) Prepare the journal entries required at December 31, 2010, and December 31, 2011, assuming that the inventory is recorded at market, and a perpetual inventory system (direct method) is used.
Date Description/Account Debit Credit
12/31/10 options=Cost of goods sold,Inventory,Recovery of loss due to market decline of inventory,SalesLoss due to market decline of inventory,Allowance to reduce inventory to market,Cash
Inventory,Allowance to reduce inventory to market,Cost of goods sold,Cash,Recovery of loss due to market decline of inventory,Loss due to market decline of inventory,Sales
12/31/11 Allowance to reduce inventory to market,Cash,Cost of goods sold,Recovery of loss due to market decline of inventory,Sales,Loss due to market decline of inventory,Inventory
Inventory,Cost of goods sold,Recovery of loss due to market decline of inventory,Allowance to reduce inventory to market,Sales,Loss due to market decline of inventory,Cash
(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.
Date Description/Account Debit Credit
12/31/10 Sales,Cash,Loss due to market decline of inventory,Cost of goods sold,Inventory,Allowance to reduce inventory to market,Recovery of loss due to market decline of inventory
Allowance to reduce inventory to market,Loss due to market decline of inventory,Cost of goods sold,Sales,Inventory,Recovery of loss due to market decline of inventory,Cash
12/31/11 Cash,Loss due to market decline of inventory,Inventory,Recovery of loss due to market decline of inventory,Allowance to reduce inventory to market,Cost of goods sold,Sales
Inventory,Cash,Recovery of loss due to market decline of inventory,Sales,Cost of goods sold,Loss due to market decline of inventory,Allowance to reduce inventory to market
(c) Which of the two methods above provides the higher net income in each year?