Question

Pharoah 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 Pharoah, has gathered the following data concerning inventory.

At May 31, 2020, the balance in Pharoah’s Raw Materials Inventory account was $456,960, and Allowance to Reduce Inventory to Market had a credit balance of $28,300. 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 Pharoah’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		$78,400		$70,000			$71,680			$62,720			$5,712
Cedar shake siding		96,320		88,928			105,280			94,976			8,288
Louvered glass doors		125,440		138,880			208,768			188,496			20,720
Thermal windows		156,800		141,120			173,376			156,800			17,248
Total		$456,960		$438,928			$559,104			$502,992			$51,968

(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

	Cost	Replacement Cost	Sales Price	Net Realizable Value (Ceiling)	Normal Profit	NRV - Normal Profit (Floor)	Market Value	LCM
Aluminium siding	78400	70000	71680	62720	5712	57008	62720	62720
Cedar shake siding	96320	88928	105280	94976	8288	86688	88928	88928
Louvered glass doors	125440	138880	208768	188496	20720	167776	167776	125440
Thermal windows	156800	141120	173376	156800	17248	139552	141120	141120
	456960	438928	559104	502992	51968			418208

(a1) Balance in the Allowance to Reduce Inventory to Market: $38752

Cost $456960 - LCM $418208 = $38752

(a2) The amount of the gain (loss): ($10452)

The Allowance to Reduce Inventory to Market has a credit balance of $28300.

For the balance in the Allowance to Reduce Inventory to Market to be $38752, an additional credit of $10452 ($38752 - $28300) will be required by debiting the loss by the same amount.