Pearl Home Improvement Company installs replacement siding, windows, and louvere

Question

Pearl Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2017. Jim Alcide, controller for Pearl, has gathered the following data concerning inventory. At May 31, 2017, the balance in Pearl’s Raw Materials Inventory account was $452,880, and Allowance to Reduce Inventory to Market had a credit balance of $28,520. Alcide summarized the relevant inventory cost and market data at May 31, 2017, in the schedule below. Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Pearl’s May 31, 2017, financial statements for inventory at lower-of-cost-or-market as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle. Assume Garcia uses LIFO inventory costing. Cost Replacement Cost Sales Price Net Realizable Value Normal Profit Aluminum siding $77,700 $69,375 $71,040 $62,160 $5,661 Cedar shake siding 95,460 88,134 104,340 94,128 8,214 Louvered glass doors 124,320 137,640 206,904 186,813 20,535 Thermal windows 155,400 139,860 171,828 155,400 17,094 Total $452,880 $435,009 $554,112 $498,501 $51,504 (a1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017. Balance in the Allowance to Reduce Inventory to Market $ (a2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market. The amount of the gain (loss)

Explanation / Answer

Calculations of Proper Balance on the Allowance to Reduce Inventory to Market At May 31, 2017 Cost Replacement Cost NRV (Ceiling) NRV less normal profit (Floor) LCM Aluminum siding 77,700 69,375 62,160 56,499 62,160 95,460 88,134 94,128 85,914 88,134 $124,320 $137,640 186,813 166,278 $124,320 $155,400 139,860 155,400 138,306 139,860 452,880 435,009 498,501 446,997 414,474 Inventry cost 452,880 LCM valuation 414,474 Allowance at May 31, 2017 38,406 2 Balance prior to adjustment 28,520 Required balance 38,406 Loss to be recorded -9,886

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