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.