P9-2 (Lower-of-Cost-or-Market) Garcia Home Improvement Company installs replacem
ID: 2420120 • Letter: P
Question
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.
Explanation / Answer
Calculations of Proper Balance on the Allowance to Reduce Inventory to Market At May 31, 2014.
Step -1 Calculation of Floor and ceiling
Step-2
Calculation of Market amount used in the lower of cost or market rule:
(1) If the current replacement cost is between the floor and the ceiling, - current replacement cost
(2) If the current replacement cost is greater than the ceiling - ceiling amount
(3) If the current replacement cost is lower than the floor - floor amount
Step-3
Calculation of Lower of Cost or Market (LCM) Valuation
Step -4
Calculations of Proper Balance on the Allowance to Reduce Inventory to Market At May 31, 2014
Answer is $34600
Pariculars Cost Replacement cost NRV (Ceiling) NRV less Normal Profit (Floor) Aluminium Siding 70000 62500 56000 50900 Cedar Shake Siding 86000 79400 84800 77400 Louvered Glass Doors 112000 124000 168300 149800 Thermal Windows 140000 126000 140000 124600 Total 408000 391900 449100 402700Related Questions
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