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Lower-of-Cost-or-Market

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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, 2010, and Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.

At May 31, 2010, the balance in Garcia's 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, 2010, 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's May 31, 2010, 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.

　　　　　　　　　　　　　　　　Replacement　 　Sales　　Net Realizable　　　Normal
　　　　　　　　　　　　Cost　　　　Cost　　　　Price　　　Value　　　　　　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, 2010.
2. For the fiscal year ended May 31, 2010, determine the amount of the gain or the loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market.

b. Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.

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The solution explains inventory valuation using lower of cost or market

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