The management of Red Carpet Ltd, a carpet manufacturing company, identified a specific carpet CPA213 of which the last sales transaction happened more than 12 months ago. A substantial value of closing stock, finished product and raw material, is included in the closing balance of inventory as at the end of February 2018. Although it is highly unlikely that the cost of stock will be recovered, management is reluctant to write off the stock value of carpet CPA213 in the hope that they might sell the stock sometime in the future.

1. Do you agree with the accounting treatment of the specific carpet?

2. Identify and comment on which assets, liabilities, income, and expenses are overstated or understated

3. Provide 2 (two) reasons why you think the managing director would have issued this instruction