Question

Problem 9-04 a

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Pearl 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 Pearl, has gathered the following data concerning inventory.

At May 31, 2020, the balance in Pearl’s Raw Materials Inventory account was $456,960, and Allowance to Reduce Inventory to Market had a credit balance of $28,300. 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 Pearl’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.

Answer 1

al) Replacement Cost NRV (Ceiling) NRV less normal profit (Floor) LCM Aluminum siding $78,400 $70,000 $62,720 $57,008 $62,720 Cedar shake siding $96,320 $88,928 $94,976 $86,688 $88,928 Louvered glass doors $125,440 $138,880 $188,496 $167,776 $125,440 Thermal windows $156,800 $141,120 $156,800 $139,552 $141,120 Total $456,960 $438,928 $502,992 $451,024 $418,208 Inventory cost $456,960 LCM valuation $418,208 Allowance at May 31, 2020 $38,752 The balance in the Allowance to Reduce Inventory to Market at May 31, 2020, should be $38,752. a2) Balance prior to adjustment $28,300 Required balance ($38,752) Loss to be recorded ($10.452) For the fiscal year ended May 31, 2020, the loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market would be $10,452.