Question

Sheffield 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, 2020. Jim Alcide, controller for Sheffield, has gathered the following data concerning inventory.

At May 31, 2020, the balance in Sheffield’s Raw Materials Inventory account was $501,840, and Allowance to Reduce Inventory to Market had a credit balance of $29,360. Alcide summarized the relevant inventory cost and market data at May 31, 2020, in the schedule below.

Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Sheffield’s May 31, 2020, 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		$86,100		$76,875			$78,720			$68,880			$6,273
Cedar shake siding		105,780		97,662			115,620			104,304			9,102
Louvered glass doors		137,760		152,520			229,272			207,009			22,755
Thermal windows		172,200		154,980			190,404			172,200			18,942
Total		$501,840		$482,037			$614,016			$552,393			$57,072

Answer 1

Sheffield Home Improvement Company Calculations of Proper Balance in the Allowance to Reduce Inventory to Market At May 31, 2020 Replacement NRV Cost Cost (Ceiling) Aluminum siding 86100 76875 68880 Cedar shake siding 105780 97662 104304 Louvered glass doors 137760 152520 207009 Thermal windows 172200 154980 172200 Total 501840 482037 552393 NRV less normal profit (Floor) 62607 95202 184254 153258 495321 LCM 68880 97662 137760 154980 459282 Inventory cost LCM valuation Allowance at May 31, 2020 501840 459282 42558 29360 Balance prior to adjustment Required balance Loss to be recorded -42558 -13198