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)
Need help with this assignment or a similar one? Place your order and leave the rest to our experts!