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Carla Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and con

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(a1) In order to arrive at Lower of Cost or Market (LCM) , we need to first calculate Market price of each inventory item. Market price cannot exceed NRV and cannot be less than NRV less normal profit. Accordingly please find below the calculations:

Item Name Original Cost Replacement Cost NRV Profit NRV less profit Market Cost (Middle value of A,B or C)
A B C
Aluminium Siding            86,800            77,500            69,440            6,324            63,116            69,440
Cedar Shake Siding          106,640            98,456          105,152            9,176            95,976            98,456
Louvered Glass Doors          138,880          153,760          208,692          22,940          185,752          185,752
Thermal Windows          173,600          156,240          173,600          19,096          154,504          156,240
         505,920          485,956          556,884          57,536          499,348          509,888

Thus, inventory as at May 31, 2020 has to be reported at $ 509,888; Hence Journal entry would be

Dr. Allowance to reduce inventory to Market $ 3,968 (i.e.) 509888-505920

Cr. Gain/(loss) on LCM Adjustment $ 3,968

(Being inventory adjusted based on LCM workings)

Current balance in Allowance to reduce inventory to Market account - $ 28,290 cr

Add/(Less): Balance as per above journal entry - $ 3,968 dr

Balance in Allowance to reduce inventory to Market account would become - $ 24,322 cr

(a2) As per above workings, amount of gain reported in income statement for period ending May 31, 2020 would be $ 3,968

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