Question

Problem 9-2 Pina 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 Pina, has gathered the following data concerning inventory. At May 31, 2017, the balance in Pina’s Raw Materials Inventory account was $493,680, and Allowance to Reduce Inventory to NRV had a credit balance of $27,670. 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 Pina’s May 31, 2017, financial statements for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle. Cost Sales Price Net Realizable Value Aluminum siding $84,700 $77,440 $67,760 Cedar shake siding 104,060 113,740 102,608 Louvered glass doors 135,520 225,544 203,643 Thermal windows 169,400 187,308 169,400       Total $493,680 $604,032 $543,411

Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2017. Balance in the Allowance to Reduce Inventory to NRV $

For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV. (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) The amount of the gain (loss) $

Answer 1

Answer 1

Balance in the Allowance to Reduce Inventory to NRV $

$18,392

Answer 2

Balance in the Allowance to Reduce Inventory to NRV $

$9,278

Calculated as

	Cost	Net Realizable Value	Lower of Cost or NRV
Aluminum siding	$84,700	$67,760	$67,760
Cedar shake siding	104,060	102,608	102,608
Louvered glass doors	135,520	203,643	135,520
Thermal windows	169,400	169,400	169,400
Total	$493,680	$543,411	$475,288
Value of inventory as per LCNRV	$475,288
Cost of Inventory	$493,680
Loss on valuation = $493680-475288	$18,392

(balance required in Allowance account) = $18392

So gain on valuation according to LCNrv = $27670-$18392 = $9278

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