AC 302 CHAPTER 9 PROBLEM 2

AC 302 CHAPTER 9 PROBLEM 2
Name				Date		
Instructor				Course		
Intermediate Accounting 14th Edition by Kieso Weygandt and Warfield						
Primer on Using Excel in Accounting by Rex A Schildhouse						
						
P9-2 (Lower-of-Cost-or-Market) Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes in northern New Jersey and southern New York. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2012, and Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.						
						
						
						
						
At May 31, 2012, the balance in Garcia- Raw Material Inventory account was						$408,000 
and the Allowance to Reduce Inventory to Market had a credit balance of						$27,500 
Alcide summarized the relevant inventory cost and market data at May 31, 2012, in the schedule below.						
Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia- May 31, 2012, financial statements for inventory under the lower-of-cost-or-market rule as applied to each item in inventory. Devereaux expressed concern over departing from the cost principle.						
						
						
						
		Cost	"Replacement
Cost"	Sales Price	"Net Realizable
Value"	Normal Profit
Aluminum siding		$70,000 	$62,500 	$64,000 	$56,000 	$5,100 
Cedar shake siding		86,000 	79,400 	94,000 	84,800 	7,400 
Louvered glass doors		112,000 	124,000 	186,400 	168,300 	18,500 
Thermal windows		140,000 	126,000 	154,800 	140,000 	15,400 
Total		$408,000 	$391,900 	$499,200 	$449,100 	$46,400 
						
Instructions:						
(a) (1) Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2012.						
						
Calculations of Proper Balance on the Allowance to Reduce Inventory to Market At May 31, 2012.						
						
	Cost	"Replacement
Cost"	"NRV
(Ceiling)"	"NRV less
normal profit
(Floor)"	LCM	
Aluminum siding	Amount	Amount	Amount	Amount	Amount	
Cedar shake siding	Amount	Amount	Amount	Amount	Amount	
Louvered glass doors	Amount	Amount	Amount	Amount	Amount	
Thermal windows	Amount	Amount	Amount	Amount	Amount	
Totals	Formula	Formula	Formula	Formula	Formula	
						
	Inventory cost			Amount		
	LCM valuation			Amount		
	Allowance at May 31, 2012			Formula		
						
(a) (2) For the fiscal year ended May 31, 2012, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market.						
						
						
Enter text answer here as appropriate.						
						
						
	Balance prior to adjustment			Amount		
	Required balance			Amount		
	Loss to be recorded			Formula		
						
(b) Explain the rationale for the use of the lower of cost or market rule as it applies to inventories.						
						
Enter text answer here as appropriate.						
						
						
						
						
Enter text answer here as appropriate.