Garcia Home Improvement Company installs replacement siding, windows, and louver
ID: 2775624 • Letter: G
Question
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 Materials Inventory account was $568,344, and Allowance to Reduce Inventory to Market had a credit balance of $27,870. 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 historical cost principle.
Cost
Replacement Cost
Sales Price
Net Realizable Value
Normal Profit
$64,635
a1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2014.
(a2) 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 Allowance to Reduce Inventory to Market.
Cost
Replacement Cost
Sales Price
Net Realizable Value
Normal Profit
Aluminum siding $ 97,510 $ 87,063 $ 89,152 $ 78,008 $ 7,104 Cedar shake siding 119,798 110,604 130,942 118,126 10,308 Louvered glass doors 156,016 172,732 259,655 234,442 25,771 Thermal windows 195,020 175,518 215,636 195,020 21,452 Total $568,344 $545,917 $695,385 $625,596$64,635
Explanation / Answer
Cost Sales Price Applying lower to cost item wise Aluminum siding $ 97,510 $ 89,152 $ 89,152 Cedar shake siding $ 119,798 $ 130,942 $ 119,798 Louvered glass doors $ 156,016 $ 259,655 $ 156,016 Thermal windows $ 195,020 $ 215,636 $ 195,020 Total $ 568,344 $ 695,385 $ 559,986 Total loss $ (8,358) Opening balance in reduce ineventory account $ 27,870 Balance in the Allowance to Reduce Inventory to Market $ 19,512 Applying LCM on an item-by-item basis is the most conservative application since it results in the largest writedown or reduction of inventory from cost and the largest loss on the income statement.
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