Inventory Allowance


You are hired as an assistant controller at Reli

ance Corporation in March 2016 (see case below).

Respond to the following requirements. Assume a

35 percent tax rate throughout your analysis.

1. Evaluate management’s 2015 inventory write-

down (Exhibit 1) and related inventory

disclosures (Exhibit 3). Your evaluation should

address the following qu

estions on the timing of

recognizing the write-down, the amount of

the write-down, and the related disclosures.

a. Was the inventory write-down recorded

in an appropriate time period, or should

Reliance have either advanced or postponed

the recognition of the inventory write-down?

Explain. Give plausible reasons why Reliance

‘s management recorded the write-down in

the period that it did.

b. Was Reliance’s application of the LCM princi

ple consistent with GAAP? In particular,

address the appropriateness of:

i. the method of determining the amount of write-down, and

ii. the application of the LCM prin

ciple by major product categories.

2. Evaluate the Company’s approach to recording

the effect of selling th

e written-down inventory

in the first quarter of 2016. Your evaluation should address the following question:

What is the journal entry to

record the $18.6 million reduction

of the inventory allowance?


3. The CEO wants to reduce the al

lowance related to the memory

inventory in stock at the end of

the first quarter of 2016 by a

n additional $1.5 million. This r

educed allowance would signal to

the market that 2015 was an isolate

d year in terms of financial

performance. According to the

CEO, increasing the net value w

ould be consistent with the econ

omic reality because the

replacement cost of the memory products inventory – even by mos

t conservative estimates-has

gone up significantly since the

write-down recorded at the end

of 2015. Evaluate the CEO’s

suggestion. Your evaluation shou

ld address the following:

a. Present and explain the journa

l entry to record the addition

al reversal of inventory

allowance as suggested by the CEO.

b. What are the possible motivations in the CEO’s suggestion?



adjusted EPS based on the additional reversal of inventory to justify your answer)

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