Garcia home improvement company installs replacement siding, windows,

P9-2 (Lower-of-Cost-or-Market) Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes in northern New Jersey and southern New York. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2014, and Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.

 

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At May 31, 2014, the balance in Garcia’s Raw Material Inventory account was $408,000 and the Allowance to Reduce Inventory to Market had a credit balance of $27,500 Alcide summarized the relevant inventory cost and market data at May 31, 2014, in the schedule below.

 

 

Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia’s May 31, 2014, financial statements for inventory under the lower-of-cost-or-market rule as applied to each item in inventory. Devereaux expressed concern over departing from the cost principle.

 

Cost

Replacement
Cost

Sales Price

Net Realizable
Value

Normal Profit

Aluminum siding

$70,000

$62,500

$64,000

$56,000

$5,100

Cedar shake siding

86,000

79,400

94,000

84,800

7,400

Louvered glass doors

112,000

124,000

186,400

168,300

18,500

Thermal windows

140,000

126,000

154,800

140,000

15,400

Total

$408,000

$391,900

$499,200

$449,100

$46,400

 

 

Instructions

(a) (1) Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2014.

Calculations of Proper Balance on the Allowance to Reduce Inventory to Market At May 31, 2014.

 

(a) (2) For the fiscal year ended May 31, 2014, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market.

(b) Explain the rationale for the use of the lower of cost or market rule as it applies to inventories.

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