Deborah Welch is the president of a large company that owns a chain of athletic shoe stores. The company was in dire financial condition when she was hired 3 years ago.

In an effort to motivate Welch, the board of directors included a bonus plan as part of her compensation package. According to her employment contract, on January 15 of each year, Welch is paid a cash bonus equal to 5% of the amount of net income reported on the preceding December 31 income statement.

Welch was sufficiently motivated. Through her leadership, the company prospered. Her efforts were recognized throughout the industry, and she received numerous lucrative offers to leave the company. One offer was so enticing that she decided to change jobs. Her decision was made in late December 2015. However, she decided to resign effective February 1, 2016, to ensure the receipt of her January bonus.

On December 31, 2015, the chief accountant, Mary Scarborough, advised Welch that the company had a sizable quantity of damaged inventory. A warehouse fire had resulted in smoke and water damage to approximately $600,000 of inventory. The warehouse was not insured, and the accountant recommended that the loss be recognized immediately.

After examining the inventory, Welch argued that it could be sold as damaged goods to customers at reduced prices. Accordingly, she refused to allow the write-off the accountant recommended. She stated that so long as she is president, the inventory stays on the books at cost.

Question 1: Under what circumstances would a write-down be required? Under what circumstances could Welch's argument be valid?

Question 2: Assuming the write-down would be appropriate, how is the income statement and balance sheet for the current year impacted by the failure to record the write-down?

Question 3: If the write-off were taken, how much would it impact Welch's bonus ($)?