Question

You are a junior accountant at ABC Heating & Cooling. ABC is the largest commercial heating and cooling contractor in the country. In its inventory, ABC has approximately $14,000,000 of filters that do NOT meet recent Center for Disease Control (CDC) guidelines related to workplace safety in the pandemic. ABC believes its best option is to sell these filters to foreign companies, who are not required to follow CDC guidelines. ABC believes it can sell these filters over the next six months for approximately $8,000,000. Your boss has asked you to let her know how this will affect ABC’s financial statements. Be as specific as possible as to which sections will be affected and by what amounts.

Answer 1

Because of the decision taken by the government the value of stock of ABC heating and cooling reduced from 14,000,000 to 8,000,000. So the loss would be 6,000,000. This loss is not due to normal operations but which arises because of external forces outside the control of the entity.

Effect of Income statement: As the inventory valuation should be lower of 14,000,000 or 8,000,000 this loss of 6,000,000 will hit the income statement and thus the net income would be reduced to that extent.

Effect of statement of affairs: the value of inventory will appear reduced by 6,000,000.

ABC heating and cooling should also mention in its notes to account that, there is a sudden decline in the value of inventory because of the decision taken by the government and it has nothing to do with the performance of the company.