Facts
Diversified Inc. sells various products under three major units. Home Appliances Division manufactures and sells kitchen appliances designed for home use. The president of Diversified Inc. finds that the company included a material reduction in its inventory and was described as an allowance to reduce inventory to market. This division had received multiple negative reviews regarding the fires that have been caused due to the defective parts of its kitchen appliances. The president felt that it was not necessary to write this down since the reduction in the market value of the products from the third quarter was more than offset by the high margins of the High Fashion Division. The president also notes that Diversified had replaced the defective switches and the following sales showed that the market value of the products had been recovered partially. The value of the appliances should be completely recovered by the fourth quarter of the upcoming year.
Issues
Three issues should be considered regarding the concerns of the president of Diversified Inc. The first issue is the adjustment of the product value to lower of cost or market. The second issue is whether to apply the lower of cost or market to the individual item or to the entire
…show more content…
If there is no loss of income expected to take place due to the reduction of the cost prices, then the components may not need to be adjusted to market to the balanced quantities. If the components are entered into the same finished products’ inventory and are in balanced quantities, then the lower of cost or market can be directly applied to the totals of the entire inventory; if not, then apply only to the individual inventory, this procedure is applied consistently from year to