Garcia Home Improvement Company installs replacement siding, windows, and louver
ID: 2466311 • 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 $546,720, and Allowance to Reduce Inventory to Market had a credit balance of $27,040. 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
(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 $ 93,800 $ 83,750 $ 85,760 $ 75,040 $ 6,834 Cedar shake siding 115,240 106,396 125,960 113,632 9,916 Louvered glass doors 150,080 166,160 249,776 225,522 24,790 Thermal windows 187,600 168,840 207,432 187,600 20,636 Total $546,720 $525,146 $668,928 $601,794 $62,176Explanation / Answer
Cost Replacement Cost Sales Price Net Realizable Value Normal Profit Aluminum siding 93800 83750 85760 75040 6834 Cedar shake siding 115,240 106,396 125,960 113,632 9,916 Louvered glass doors 150,080 166,160 249,776 225,522 24,790 Thermal windows 187,600 168,840 207,432 187,600 20,636 Total $546,720 $525,146 $668,928 $601,794 $62,176 Inventory is valued at lower of cost or market value The market value of an item is usually its replacement cost. However, this assumption has one caveat: Market can’t go above the item’s net realizable value (ceiling) or below the item’s floor. The conservatism principle requires that an amount less than cost be used when the replacement cost is less than the original cost. When this is the case, the selling price minus the cost to complete and dispose might be the amount to be reported. Which is NRV To Take market value= Replacemnt cost must be less than NRV and more than Floor price Replacement cost Floor than replacement cost is market value else NRV or Floor will be market value for the product Replacement Cost Net Realizable Value Normal Profit Floor NRV-Normal Profit Market Value Market value Cost Ending inventoryLower of Cost or Market value Allowance to Reduce Inventory Aluminum siding 83750 75040 6834 68206 NRV 75040 93800 75040 18760 Cedar shake siding 106396 113632 9916 103716 Replacement Cost 106,396 115240 106,396 8844 Louvered glass doors 166160 225522 24790 200732 Floor 200732 150080 150,080 0 Thermal windows 168840 187600 20636 166964 Replacement Cost 168,840 187600 168,840 18760 Total 525146 601794 62176 539618 551008 546720 500356 46364 Ans a 1The closing balance on May 31 of Allowance to reduce Inventory to market is 46364 Ans Ans a2 The amount of loss for May 31 46364-27040 19324 AnsRelated Questions
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