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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


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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Solution Summary

The solution explains inventory valuation using lower of cost or market

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