At the End of the First Year of a Firm's

Essay

At the end of the first year of a firm's operations, the total inventory at cost was $200 and the market value (for purposes of Lower of Cost or NRV valuation) was $220. The corresponding values at the end of years 2 and 3 are as follows: $\begin{array} { | l | l | l | } \hline & \text { Year 2 } & \text { Year 3 } \\\hline \text { Cost } & \$ 400 & \$ 600 \\\hline \text { Market } & 340 & 640 \\\hline\end{array}$
Required:
provide the adjusting entries at the end of years 2 and 3 to record inventory at Lower of Cost or NRV using:
(a) the direct reduction method, and
(b) the inventory allowance method.
For both methods, use the cost of goods sold account when recording ending inventory (periodic system).