Sound Traxs Inc. sells and rents DVDs to retail customers. The accountant is aware that at the end of the year, she must account for inventory, but is unsure what DVDs are considered inventory and how to value them. DVDs purchased by the company are placed on the shelf for rental. Every three weeks, the company performs a detailed analysis of the rental income from each DVD and decides whether to keep it as a rental or to offer it for sale in the resale section of the store. Resale DVDs sell for $10 each regardless of the price Sound Traxs paid for the tape.

Required
1. How should Sound Traxs account for each of the two types of DVDs—rentals and resales—on its balance sheet?
2. How would you suggest Sound Traxs account for the DVDs as they are transferred from one department to another?