Since the amount of the write-down of inventory reduces net income, it will also reduce the amount reported on the balance sheet for owner's equity or stockholders' equity. If the amount of the Loss on Write-Down of Inventory is significant, it should be reported as a separate line on the income statement.
If the amount of the Loss on Write-Down of Inventory is relatively small, it can be reported on the income statement as part of the cost of goods sold. Under FIFO and average cost methods, if the net realizable value is less than the inventory's cost, the balance sheet must report the lower amount. Example of Reporting a Write-down in Inventory In Thor Power, the taxpayer improperly wrote down the same type of inventory as in the case at bar i.e.replacement parts for products no longer produced but still in H. The debit in the entry to write down inventory is recorded in an account such as Loss on Write-Down of Inventory, which is an income statement account. § 1.471-2(c), which contains the so-called subnormal goods exception, requires a sound reason for the goods not being salable at normal prices. Often the balance in the current asset account Inventory is reduced through a credit to a contra inventory account, which is referred to as a valuation account. On line 9d - If LIFO was used, enter amount of ending inventory computed under LIFO, enter the appropriate amount in the box, if applicable. Select 9c - LIFO was adopted this tax year, if appropriate. Under FIFO and average cost methods, when the net realizable value of inventory is less than the cost of the inventory, there needs to be a reduction in the inventory amount. Select 9b - There was a write-down of subnormal goods, if appropriate. How do you report a write-down in inventory? Definition of Write-down in Inventory