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Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements?
Choice 'd' is correct. When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time.
Choice 'a' is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.
Choice 'b' is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.
Choice 'c' is incorrect. Since the loss is not probable at the end of the second quarter, no amount should be recognized at that time.