Reference no: EM132600074

Question - The Hartley Company, owned and operated by Bill Hartley, manufactures and sells high-end ergonomic office chairs and custom bookshelves. The company has reported profits in the majority of years since the company's inception in 1975 and is projecting a profit in 2018 of $65,000, down from $96,000 in 2017.

Near the end of 2018, the company is in the process of applying for a bank loan. The loan proceeds will be used to replace manufacturing equipment to modernize the manufacturing operation. In preparing the financial statements for the year, the chief accountant, Don Davis, mentioned to Bill Hartley that net realizable value (NRV) of the bookshelf inventory is below its cost by $40,000 and should be written off in 2018. However, no write-off is necessary for office chairs because their NRV is $50,000 above cost.

Bill is worried that the write-down would lower 2018 income to a level that might cause the bank to refuse the loan. Without the loan, it would be difficult for the company to compete. This could decrease future business, and employees might have to be laid off. Bill suggests to Don that the company combine the office chairs and bookshelves into a single inventory category (office furniture) for reporting purposes so that the combined NRV is above the combined cost. In this case, no inventory write-down would be needed. The company has not previously combined these inventory items and has no stated policy on the matter. Don is contemplating his responsibilities in this situation.

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What are your alternatives?

What would be your course of action and why?