Final answer:
The account credited when market cost is lower than production cost using the indirect write-down method is the Allowance to Reduce Inventory to Market. The correct option is A.
Step-by-step explanation:
When the market cost is lower than the inventory cost, and the indirect method of recording the write-down is used, the account that is credited is Allowance to Reduce Inventory to Market.
The mechanism behind the write-down is related to the conservative principle in accounting, which states that potential expenses and liabilities should be recognized immediately. In contrast, potential gains are only recognized when they are realized. Thus, if inventory cannot be sold for more than it costs to produce or purchase, an allowance account is used to reflect the lower market value.
By using the indirect method, the company avoids directly reducing the value of the inventory on the balance sheet. Instead, it creates a contra asset account under the name "Allowance to Reduce Inventory to Market", which is then subtracted from the Inventory account’s balance in the financial statements. This allowance effectively adjusts the inventory from its historical cost to its market value.
It's worth noting that market conditions, such as supply and demand, are often responsible for the market cost falling below the production cost, and this does not necessarily indicate a fault in the production process.