Question

Problem 9-2 (Part Level Submission) Bonita 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, 2017. Jim Alcide, controller for Bonita, has gathered the following data concerning inventory. At May 31, 2017, the balance in Bonita’s Raw Materials Inventory account was $452,880, and Allowance to Reduce Inventory to NRV had a credit balance of $27,660. Alcide summarized the relevant inventory cost and market data at May 31, 2017, in the schedule below. Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Bonita’s May 31, 2017, 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 $77,700 $71,040 $62,160 Cedar shake siding 95,460 104,340 94,128 Louvered glass doors 124,320 206,904 186,813 Thermal windows 155,400 171,828 155,400 Total $452,880 $554,112 $498,501 Collapse question part (a) Correct answer. Your answer is correct. Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2017. Balance in the Allowance to Reduce Inventory to NRV $Entry field with correct answer 16872 Click if you would like to Show Work for this question: Open Show Work SHOW SOLUTION SHOW ANSWER LINK TO TEXT LINK TO TEXT Attempts: 1 of 7 used Collapse question part (b) For the fiscal year ended May 31, 2017, 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)

Answer 1

a) Calculation of Balance in Allowance to Reduce Inventory to NRV at May 31, 2017 (Amounts in $)

Item of Inventory	Cost (A)	Sales Price (B)	Net Realizable Value (C)	LCNRV (Lower of A or C)
Aluminium Siding	77,700	71,040	62,160	62,160
Cedar shake siding	95,460	104,340	94,128	94,128
Louvered glass doors	124,320	206,904	186,813	124,320
Thermal windows	155,400	171,828	155,400	155,400
Total	452,880	554,112	498,501	436,008
Inventory Cost (1)				452,880
LCNRV Valuation (2)				436,008
Required Balance in Allowance at May 31, 2017 (1-2)				16,872

Therefore, Balance in the Allowance to Reduce Inventory to NRV is $16,872.

Notes:-

1) The lower of cost or Net realizable value is used for valuation of each item of inventory under LCNRV valuation method.

2) Total LCNRV valuation is equal to $436,008 as shown in the above table. Difference between actual cost of inventory and LCNRV valuation is the required balance in allowance at May 31, 2017.

b) Calculation of gain or loss to be recorded (Amounts in $)

Balance prior to adjustment	27,660
Less: Required balance at May 31, 2017	(16,872)
Loss to be recorded	10,788

Therefore the amount of the loss that would be recorded (using the loss method) due to the change in Allowance to Reduce Inventory to NRV is $10,788.