Hazel is concerned as a plant disease has affected the leaves on all the fruit trees, which form part of the inventory of the business. These fruit trees are currently recorded at their original cost price of $230,000. The fruit trees are still able to be sold, however due to the damage they will need to be sold at a reduced price. Hazel has established that the estimated selling price (i.e. Net Realisable Value) of the damaged fruit trees is now $180,000.

Hazel understands that there is an accounting rule she must apply in accordance with the concept of conservatism when recording an inventory balance and would like your advice.

1. What is the name of the rule that Hazel is referring to?      

2. Given the facts provided above, what will be the dollar impact of applying this rule to the following accounts of Darling buds Nursery?

(State both the dollar impact and whether it will increase or decrease the balance)

Inventory account

Cost of Goods Sold?  

Gross Profit?

3. Explain in your own words why Hazel would be breaching the accrual accounting concept if she does not apply the rule identified in Q2(b)(i) above. In your answer, you need to refer to the three parts of the accounting definition of an expense.