Pearl 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 Pearl, has gathered the following
data concerning inventory.
At May 31, 2020, the balance in Pearl’s Raw Materials Inventory
account was $444,720, and Allowance to Reduce Inventory to NRV had
a credit balance of $27,340. 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 Pearl’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.
Cost | Sales Price | Net Realizable Value | ||||
| Aluminum siding | $76,300 | $69,760 | $61,040 | |||
| Cedar shake siding | 93,740 | 102,460 | 92,432 | |||
| Louvered glass doors | 122,080 | 203,176 | 183,447 | |||
| Thermal windows | 152,600 | 168,732 | 152,600 | |||
| Total | $444,720 | $544,128 | $489,519 |
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Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2020.
| Balance in the Allowance to Reduce Inventory to NRV | $ |
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For the fiscal year ended May 31, 2020, determine the amount of the gain or loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV.(Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
| The amount of the gain (loss) | $ |
Working as follows:
| Cost | NRV | LCM | |
| Aluminium siding | $76,300 | $61,040 | $61,040 |
| Cedar shake siding | $93,740 | $92,432 | $92,432 |
| Louvered glass doors | $122,080 | $183,447 | $122,080 |
| Thermal windows | $152,600 | $152,600 | $152,600 |
| Totals | $444,720 | $489,519 | $428,152 |
Inventory Cost = $444,720
LCM Valuation = $428,152
Allowance on may 31, 2020 [$444,720 - $428,152] = $16,568
__________________________________________________________________
Determine the amount of the 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 adjustment | $27,340 |
| Required balance | $16,568 |
| Gain to be recorded [$27340 - $16568] | $10,772 |
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