ed has two items in inventory as of December 312014 Each ite

ed has two items in inventory as of December 31,2014. Each item was purchased for $40 couragement chose to write down Item #1 to $28, which at year-end was assessed to be its market ment did not write down Item #2 because its market value was estimated to be greater than Incorporat Manage During 2015, each item was sold for $50 cash ec ej mal entries for each activity (ie the write-down, the sale of Item #1 and the sale of Item #2) Grphin how management could manipulate reported earnings when applying the lower-of-cost-or- te the profit or loss associated with each item in 2014 and 2015, Bplain how management could manipulate reported earnings when applying the market rule.

Solution

(a) Journal Entries for each activity date General Journal Debit Credit For Write down item #1 2014 Writedown Damaged Goods A/c $12          To Inventory item #1 $12 (Being invenotry item #1 has Been value at Lower of Cost or market value ($40-$28) 2015 Sale of item #1 Cash A/c $50       To Inventory item #1 $28       To Profit & Loss A/c $22 (being item #1 has been sold at $50) 2015 Sale of item #2 Cash A/c $50       To Inventory item #2 $40       To Profit & Loss A/c $10 (being item #2 has been sold at $50) (b) profit & Loss associated With each item in 2014 and 2015 2014 2015 item #1 ($12) $22 item #2 $10 Profit & Loss ($12) $32 (c ) How management Colud maniplate reported earnings when applying the Lower of Cost or market Value management can maniplate the Profit , By reducing the Invenotry value using the method Lower Cost or market value. It Can reduces the profit by reducing the Inventory value below the Cost , recognise the reduction price of inventory has Expenses to the profit and Loss statement.it results Lower profit or Sometime even generate loss instead of profits