Question

A 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 Crane, has gathered the following data concerning inventory.

At May 31, 2020, the balance in Crane’s Raw Materials Inventory account was $432,480, and Allowance to Reduce Inventory to Market had a credit balance of $29,000. 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 Crane’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.

Cost Replacement Cost Sales Price Net Realizable Value Normal Profit
Aluminum siding $74,200 $66,250           $67,840           $59,360 $5,406  
Cedar shake siding       91,160   84,164           99,640 89,888 7,844  
Louvered glass doors 118,720 131,440           197,584           178,398 19,610  
Thermal windows 148,400 133,560           164,088           148,400 16,324  
Total $432,480 $415,414           $529,152           $476,046 $49,184  

(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

The proper balance in Allowance to Reduce Inventory to NRV at May 31, 2020.

	COST	NET REALIZABLE VALUE	LCM
Aluminum siding	74200	$67,840	$67,840
Cedar shake siding	91160	99,640	91160
Louvered glass doors	118720	197,584	118720
Thermal windows	148400	164,088	148400
Totals	$432480	$529,152	426120

Inventory cost = $432480

LCM valuation = $426120

Allowance on may 31,2020 = $6360

Gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV.

Balance exist before adjusment = $29,000

Required balance = $6360

Gain to be recorded = $22640