The inventory records of the Frost Company for the years 2007 and 2008 reveal the cost and market of the January 1, 2007 inventory to be $125,000. On December 31, 2007 the cost of inventory was $130,000, while the market value was only $128,000. The December 31, 2008 market value of inventory was $140,000, and the cost was only $135,000. The Frost Company uses a periodic inventory system. Purchases for 2007 were $100,000 and for 2008 were $110,000.

Required

1. Prepare the journal entries at the end of 2007 and 2008 to record the lower of cost or market under the

(a) Allowance method, and

(b) Direct method.

2. Prepare the cost of goods sold section of the income statement and show how the company would record the inventory on its balance sheet for 2007 and 2008 under the

(a) Allowance method, and

(b) Direct method.