Apple Corporation has never been audited before the current year. An audit is now needed from a CPA because the company is expanding rapidly and plans to issue stock to the public in a secondary offering. A CPA firm has been doing preliminary evaluations of the Apple Corporation’s accounts and records. One major problem involves the valuation of inventory under GAAP. Apple Corporation has been valuing its inventory under the cost method and no write-downs have been made for obsolescence. A review of the inventory indicates that obsolescence and excess spare parts in the inventory are two major problems. The CPA states that for GAAP the company will be required to write down its inventory by 25% of its stated amount, or $100,000, and charge this amount against net income from operations for the current period. Otherwise, a “clean opinion” will not be rendered. The company controller asks your advice regarding the tax consequences from the obsolescence and spare parts inventory write-downs for the current year and the procedures for changing to the LCM method for tax purposes. Apple Corporation is on a calendar year, and the date of your contact with the company is December 1 of the current year.
A partial list of research sources is:
• Secs. 446 and 471
• Reg. Secs. 1.446-1(e)(3), 1.471-2 and 1.471-4
• American Liberty Pipe Line Co. v. CIR, 32 AFTR 1099, 44-2 USTC ¶9408 (5th Cir., 1944)
• Thor Power Tool Co. v. CIR, 43 AFTR 2d 79-362,79-1 USTC ¶9139 (USSC, 1979)