Question

Blue 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 Blue, has gathered the following data concerning inventory.

At May 31, 2017, the balance in Blue’s Raw Materials Inventory account was $473,280, and Allowance to Reduce Inventory to Market had a credit balance of $25,830. 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 Blue’s May 31, 2017, 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.
(a1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017.
(a2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market.

Replacement Cost Net Realizable Value Normal Profit Cost Sales Price $5,916 $74,240 109,040 8,584 Aluminum siding Cedar shake siding Louvered glass doors Thermal windows $81,200 99,760 129,920 162,400 $72,500 92,104 143,840 146,160 216,224 $64,960 98,368 195,228 162,400 $520,956 179,568 21,460 17,864 $53,824 Total $473,280 $454,604 $579,072

Answer 1

The cost item for each inventory category is compared individually with the market value represented by net realizable value (NRV).