Reference no: EM133205824
Required: Please provide guidance for US GAAP accounting treatment for each of the following situations.
- With the introduction of the competitor's cheaper substitute, is an inventory write-down necessitated? If so, how should it be recorded?
Please provide guidance and an explanation for how FASB Accounting Standards Codifications (ASC) Topic 270 Interim Reporting answers the question - see case study below.
Case - Kold-King
Kold-King Cold is a private company which has been in operation since 2011. It is headquartered in Moxx, TX, where its largest manufacturing plant is also located. The company has two additional plants, one in Houston, TX and the other in Oklahoma City, OK. Kold-King's sole line of business involves manufacturing plastic bottles that are designed to keep beverages chilled for extended periods of time. The bottles feature a uniquely rugged build that makes them suitable for both indoor and outdoor recreation, and they are sold at sporting goods stores such as Academy Sports and Dick's Sporting Goods.
The bottles are Polyethylene Terephthalate (PET) plastic products. This sort of plastic is constructed of resins that are produced from natural gas and crude oil. Because of this, the price of the resin which Kold-King heavily relies on is tied directly to oil prices, causing the materials to be subject to price fluctuations. Resin is ordered when the raw materials account reaches a minimum on-hand balance.
On October 20, 2020, a significant global event occurred which caused heightened political unrest in the Middle East. Within a week of the event occurring, the price of crude oil surged from $25.50 per bbl to $44.15 per bbl. For the foreseeable future, expert analysts have determined that there is a 45% chance that oil prices will remain at the currently high levels, while there is a 55% chance that they will revert back to prior levels.
Kold-King operates in a market where substitutes are readily available to consumers. In the spring of 2020, a competitor released a product highly similar to that of King Cold's at a significantly lower price. The rival product is available at all of the same retailers from which Kold-King's product is sold.
Lastly, Kold-King maintains relationships with four key distributors which they sell their product to directly. Two are related to production in Frisco, one to Houston production, and one to Oklahoma City production. In November 2020, however, the Houston distributor abruptly cut ties with Kold-King due to undisclosed reasons. As a result, the plant in Houston has reduced capacity by 20% to accommodate for less storage space due to the unanticipated inventory buildup.