Prepare a memo that summarizes relevant professional standards (standard and paragraph should be cited) related to each of the 6 issues and prepare any proposed journal entries. Discuss information that would be included in any note disclosures related to each of the six items (you need not draft formal note disclosures). Prepare entries for all misstatements you identify, regardless of the amount involved. That is, dont simply say no entry is needed because any amount involved would be immaterial. Assume current income is $1,323,839. Ignore income tax implications, for purposes of preparing journal entries, as any changes in taxes will be reflected later in the audit process after any entries have been posted to the working trial balance.

Issue 5: Inventory

Included in ACEs inventory (valued using the LIFO method) are the following:

• $100,000 (cost) of computers which manufacturers ceased producing in the middle of 2017. Although the wholesale value (replacement cost) of these computers now is only about $60,000, the retail value (if they could all be sold today, which they cant be) is approximately $110,000. The selling costs of these specific machines are considered negligible, and a normal profit margin is approximately 25% of sales price. The retail market is thin and it will take some time to sell the computers. Management intends to sell all of these computers at retail and believes that the retail value of these computers is likely to decrease at an average rate of 5% every quarter for the next year; thus, on average a computer with a retail value of $1,000 on 12/31/17 would have an average retail value of $950 and $900 during the first two quarters of 2018, respectively. Management believes that the computers will be sold within the next year as follows--first quarter 40% of inventory, second quarter 35%, third quarter 20 %, and fourth quarter 5% at market values at the time of sale. These projections seem reasonable. It is currently February 15 and you note that sales are right on schedule and that retail prices have dropped a bit from year-end, as projected.

• Because of discontinuance of the above computers, many suppliers of parts for these computers have chosen to quit manufacturing the items creating a market shortage. As a result, ACEs $50,000 inventory of parts for these machines has increased in value and would now cost $65,000 to replace (its retail value is $110,000). Historically, the normal profit margin on sales of parts is 40% of sales price. In addition, management has pointed out to you that computers in inventory that do not sell could be used for parts but they do not anticipate the need to do this.

• Historically, ACE (and competitors) have in general separated Computers from Parts when calculating the lower of cost or market for inventory.

Inventory Item	Replacement Cost	Net Realizable Value	Net Realizable Value Normal Profit Margin 40%	Market Value	Historical Cost
Computers	$	$*	$*	$	$ 100,000
Parts	$	$ 110,000	$ **	$	$ 50,000

Combined $ $

$ 140,250 $

Lower of Cost or Market

$

$ $ 150,000 $

*Net Realizable Value = Current Sales Price x Percentage sold in Quarter x Quarters Average Price **Net Realizable Value Normal Profit Margin = $110,000

Does ACE need to record an inventory write-down to reflect a lower of cost or market value? If so, how much?