90.2K

Verified Solution

Link Copied!

Using the FASB Codification, develop two memos to your client using the outline presented.

Facts - State the relevant facts surrounding the issue.

Issue(s) - List the researchable questions you are trying to answer.

Analysis - Include all relevant authoritative guidance, along with analysis in your own words of how the guidance applies to your fact pattern.

Conclusion - State your conclusion based on your research, highlighting key factors considered. Provide more detail for highly judgmental issues.

Financial Statement and Disclosure Impacts - Summarize financial statement accounts affected and any disclosures required. Include journal entries when possible.

Sonny Corporation has never been audited before the current year. An audit is now needed by a CPA because the company is expanding rapidly and plans to issue stock to the public. A CPA firm has been doing preliminary evaluations of the Sonny Corporation's accounts and records. One major problem involves the valuation of inventory under GAAP. Sonny 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 violations of Accounting Periods and Methods. 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, an unqualified (i.e., a "clean opinion") will not be rendered. The company controller asks your advice regarding the accounting and tax consequences from the obsolescence and spare parts inventory write-downs for the current year and the procedures for changing to the lower-of-cost-or-market (LCM). Sonny Corporation uses a calendar year for both book and tax purposes, and the date of your contact with the company is December 1 of the current year.

Answer & Explanation Solved by verified expert

See Answer