TII Industries makes over-voltage protectors, power systems, and electronic prod
ID: 2738968 • Letter: T
Question
TII Industries makes over-voltage protectors, power systems, and electronic products primarily for use in the communications industry. Several years ago, the company reported that it took "a substantial inventory write down" resulting in a loss for its third quarter ending June 24. The write down was estimated to be $12 million and stems from customers' changes in product specifications. A. Provide a journal entry to record the write-down. B. Assume that the original cost of inventory was $52 million and that it was written down to its market value of $40 million. If TII sells it for $48 million cash in the following period, what journal entries would be recorded? Assume that TII uses the perpetual inventory method. C. Applying the lower-of-the-cost-or-market rule in this case would cause TII to recognize a loss in the period of the write down and income in the subsequent period. Does such recognition seem appropiate? Why or why not?
Explanation / Answer
Journal entries:
(1). Loss on Write-Down of Inventory A/c Dr. $12 million
To Inventory A/c $12 million
(For the loss on write down of inventory).
(2). Cash A/c Dr. $ 48 million
To Inventory A/c $ 40 million
To Gain on Sale of Inventory A/c $ 8 million
(For the cash paid and gain on sale of inventory).
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