What is an inventory obsolescence write-down and how is it recorded?

• A. Write-down to net realizable value when inventory is obsolete or unsellable; Debit COGS or Inventory write-down; Credit Inventory.
• B. Write-down increases inventory value; Debit Inventory; Credit Revenue.
• C. Write-down is not permitted under GAAP.
• D. Write-down is recorded as a separate equity item.

Answer: (A)

When inventory is obsolete or unsellable, you must reduce its carrying amount to net realizable value (NRV), which is the estimated selling price minus costs to complete and sell. This write-down decreases the asset on the balance sheet and recognizes an expense on the income statement for the period.

The proper recording is to debit either COGS (or a separate inventory write-down expense) and credit Inventory. This accomplishes two things: it lowers the inventory balance to NRV and reflects the loss as a cost in the period, matching the reduced value with the revenue it no longer can generate.

The other approaches would misstate the financials—for example, increasing inventory value or treating the write-down as a separate equity item would not reflect the loss of value from obsolescence, and GAAP requires recognizing the impairment by reducing the inventory and charging the loss to expenses.