Question

Taco 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 Taco, has gathered the following data concerning inventory.

At May 31, 2020, the balance in Headland’s Raw Materials Inventory account was $461,040, and Allowance to Reduce Inventory to Market had a credit balance of $29,040. Alcide summarized the relevant inventory cost and market data at May 31, 2020, in the schedule below.

Alcide assigned Burger, an intern from a local college, the task of calculating the amount that should appear on Taco’s May 31, 2020, financial statements for inventory at lower-of-cost-or-market as applied to each item in inventory. Burger expressed concern over departing from the historical cost principle. Assume Burger uses LIFO inventory costing.

		Cost		Replacement Cost			Sales Price			Net Realizable Value			Normal Profit
Aluminum siding		$79,100		$70,625			$72,320			$63,280			$5,763
Cedar shake siding		97,180		89,722			106,220			95,824			8,362
Louvered glass doors		126,560		140,120			210,632			190,179			20,905
Thermal windows		158,200		142,380			174,924			158,200			17,402
Total		$461,040		$442,847			$564,096			$507,483			$52,432

(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

First, we need to determine LCM (|Lower of Cost or Market Value) of Inventory on 31st May 2020.

Item	Cost	Replacement Cost	Sales Price	Net Realizable Value	Normal Profit	NRV-NP	Market Value	LCM	WRITE OFF (Cost-LCM)
Aluminum siding	$79,100	$70,625	$72,320	$63,280	$5,763	$57,517	$63,280	$63,280	$15,820
Cedar shake siding	97,180	89,722	106,220	95,824	8,362	$87,462	89,722	89,722	$7,458
Louvered glass doors	126,560	140,120	210,632	190,179	20,905	$169,274	$169,274	126,560	$0
Thermal windows	158,200	142,380	174,924	158,200	17,402	$140,798	142,380	142,380	$15,820
Total	$461,040	$442,847	$564,096	$507,483	$52,432	$455,051	$464,656	$421,942	$39,098

Working for finding Market Value from the given data of Replacement Cost, NRV & Profit Margin:

If Replacement cost > NRV, NRV			$63,280
If NRV-NP<Replacement Cost<NRV, Replacement cost	89,722
If Replacement cost < NRV-NP, NRV-NP			$169,274
If NRV-NP<Replacement Cost<NRV, Replacement cost	142,380

a1)

Balance in the Allowance to reduce Inventory to Market = Total Cost of Inventory - Total LCM of Inventory

= $461,040 -$421,942

= $39,098.

a2)

The amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market

Required Balance on 31st May 2020 $39,098 Cr

Less: Balance already included $29,040 Cr

The amount of the gain (loss) ($10,058)

Loss to be carriedto income ststement - $10,058