Question

Carla 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 Carla, has gathered the following data concerning inventory. At May 31, 2020, the balance in Carla's Raw Materials Inventory account was $505,920, and Allowance to Reduce Inventory to Market had a credit balance of $28.290. 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 Carla'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. Aluminum siding Cedar shake siding Louvered glass doors Thermal windows Total Cost $86,800 106,640 138,880 173,600 $505,920 Replacement Cost $77,500 98,456 153,760 156.240 $485,956 Sales Price $79,360 116,560 231,136 191,952 $619,008 Net Realizable Value $69,440 105,152 208,692 173,600 $556,884 Normal Profit $6,324 9,176 22.940 19,096 $57,536 (a1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2020. Balance in the Allowance to Reduce Inventory to Market $ (a2) For the fiscal year ended May 31, 2020, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market. The amount of the gain (loss) $

Answer 1

(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