Electronics, Inc., is a high volume, wholesale merchandising company. Most of its inventory turns over four or five times a year. The company has had 50 units of a particular brand of computers on hand for over a year. These computers have not sold and probably will not sell unless they are discounted 60 to 70%. The accountant is carrying them on the books at cost and intends to recognize the loss when they are sold. This way, she can avoid a significant write down in inventory on the current year’s financial statements.
1. Is the accountant correct in her treatment of the inventory? Why or why not?
2. If the computers cost $1,000 each and their market value is 40% of their cost, journalize the entry necessary for the write down.
3. In a short paragraph, explain what is meant by conservatism and how it ties in with the lower of cost or market method of accounting for inventory.
4. In groups of three or four, make a list of reasons why inventories of electronic equipment might have to be written down.
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