# Adjusting Jornal Entry using Allowance Method

Hello! I have a (hopefully) simple question, I am hoping someone may be able to assist. I am helping my fiancee study for an accounting exam and we ran across the following question:

XXXX Company began operations in 2009 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2009, and December 31, 2010. The information is presented below:

Date________Cost___________Lower-of-Cost-or-Market
12/31/09...........\$1,000,000..........\$990,000
12/31/10...........\$2,000,000..........\$1,985,000

Assuming that the allowance method is used, the adjusting journal entry required at December 31, 2010, includes which is the following:

A) a debit to Loss on Inventory account for \$15,000
B) a debit to Cost of Gods Sold account for \$15,000
C) a debit to Loss on Inventory account for \$5,000
D) a debit to Allowance on Inventory account for \$5,000
E) a debit to Loss on Inventory account for \$10,000

My understanding is the correct answer is C. However, can anyone help me understand why? I apologize if this is a dumb question, but any input is appreciated.

My thought is that since the allowance method is used, there would be an account for which the allowance would be placed, making the D the correct answer. Except, I am not certain how \$5000 is correct. In anycase, I am wrong on all accounts.

Thanks for any help!

#### Triest123

VIP Member
Hello! I have a (hopefully) simple question, I am hoping someone may be able to assist. I am helping my fiancee study for an accounting exam and we ran across the following question:

XXXX Company began operations in 2009 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2009, and December 31, 2010. The information is presented below:

Date________Cost___________Lower-of-Cost-or-Market
12/31/09...........\$1,000,000..........\$990,000
12/31/10...........\$2,000,000..........\$1,985,000

Assuming that the allowance method is used, the adjusting journal entry required at December 31, 2010, includes which is the following:

A) a debit to Loss on Inventory account for \$15,000
B) a debit to Cost of Gods Sold account for \$15,000
C) a debit to Loss on Inventory account for \$5,000
D) a debit to Allowance on Inventory account for \$5,000
E) a debit to Loss on Inventory account for \$10,000

My understanding is the correct answer is C. However, can anyone help me understand why? I apologize if this is a dumb question, but any input is appreciated.

My thought is that since the allowance method is used, there would be an account for which the allowance would be placed, making the D the correct answer. Except, I am not certain how \$5000 is correct. In anycase, I am wrong on all accounts.

Thanks for any help!

=> D is wrong because it is an balance item to reduce the value of the inventory.

Balance sheet @31/12/09
Inventory at costs \$1,000,000
Less : Allowance on Inventory \$(10,000)
Inventory at value \$990,000

Balance sheet @31/12/10
Inventory at costs \$2,000,000
Less : Allowance on Inventory \$(15,000)
Inventory at value \$1,985,000

The accounting entry the year 2009
Dr Loss on inventory (expenses) \$10,000
Cr Allowance on Inventory \$10,000
Being the allowance provided for the inventory

The accounting entry the year 2010
Dr Loss on inventory (expenses) \$5,000
Cr Allowance on Inventory \$5,000
Being the additional allowance provided for the inventory

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