Garcia Home Improvement Company installs
replacement siding, windows, and louvered glass doors for single-family homes
and condominium
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.
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.
TUTORIAL
PREVIEW
Calculations of Proper Balance on the Allowance to
Reduce Inventory to Market At May 31, 2014.
|
Cost
|
Replacement
Cost |
NRV
(Ceiling) |
NRV less
normal profit (Floor) |
LCM
|
|
|
Aluminum siding
|
$70,000
|
$62,500
|
$56,000
|
$50,900
|
$56,000
|
|
Cedar shake siding
|
$86,000
|
$79,400
|
$84,800
|
77,400
|
$79,400
|
