Question

P9.2 (LO 1) (LCNRV) Garcia 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 Garcia, has gathered the following data concerning inventory. At May 31, 2020, the balance in Garcia's Raw Materials Inventory account was $408,000, and Allowance to Reduce Inventory to NRV had a credit balance of $27,500. 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 Garcia's May 31, 2020, financial statements for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle. Net Realizable Cost Sales Price Value Aluminum siding $ 70,000 $ 64,000 $ 56,000 Cedar shake siding 86,000 94,000 84,800 Louvered glass doors 112,000 186,400 168,300 Thermal windows 140,000 154,800 140,000

Answer 1

А в L U TE F G H J K L LIVI 1. Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 201 The balance in the Allowance to Reduce Inventory to NRV at May 31, 2010, should be $15,200, a Aluminum siding Cedar shake siding Louvered glass doors Thermal windows Totals Cost $70,000 $86,000 $112,000 $140,000 $408,000 NRV $56,000 $84,800 $168,300 $140,000 $449,100 LCNRV $56,000 $84,800 $112,000 $140,000 $392,800 No co ya UwNo Covo u w No 00 Inventory cost LCNRV valuation Allowance at May 31,2010 $408,000 392,800 15,200 2. For the Fiscal year ended May 31, 2012, determine the amount of the gain or loss that would For the fiscal year ended May 31, 2010, the gain that would be recorded due to the change in th Net Realizable Value would be $12,300, as calculated below. Balance prior to adjustment Required balace loss to be recorded $27,500 -15,200 $12,300

Explain the rationale for the use of the lower-of-cost-or market rule as it applies to inventories. The LVNRV rule is established on the concept of conservatism and the expense recognition principle. The expense recognition principle works because the value of inventory as a loss in the period in which the decline takes place. in m The departure from the cost principle for inventory valuation is permitted on the basis of conservatism. The general rule is that the historical cost principle is left alone when the relevance of an asset is not as great as its original cost. |