Garcia 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, 2020. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory. At May 31, 2020, the balance in Garcia’s Raw Materials Inventory account was $408,000, and Allowance to Reduce Inventory to NRV had a credit balance of $27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2020, 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, 2020, 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 RealizableValue Aluminum siding $ 70,000 $ 64,000 $ 56,000 Cedar shake siding   86,000   94,000   84,800 Louvered glass doors  112,000  186,400  168,300 Thermal windows  140,000  154,800  140,000  Total $408,000 $499,200 $449,100 Instructions a.    Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2020. b.    For the fiscal year ended May 31, 2020, 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. c.    Explain the rationale for the use of the LCNRV rule as it applies to inventories.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Garcia 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, 2020. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.

At May 31, 2020, the balance in Garcia’s Raw Materials Inventory account was $408,000, and Allowance to Reduce Inventory to NRV had a credit balance of $27,500. Alcide summarized the relevant inventory cost and market data at May 31, 2020, 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, 2020, 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 $ 70,000 $ 64,000 $ 56,000
Cedar shake siding   86,000   94,000   84,800
Louvered glass doors  112,000  186,400  168,300
Thermal windows  140,000  154,800  140,000
 Total $408,000 $499,200 $449,100

Instructions

a.    Determine the proper balance in Allowance to Reduce Inventory to NRV at May 31, 2020.

b.    For the fiscal year ended May 31, 2020, 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.

c.    Explain the rationale for the use of the LCNRV rule as it applies to inventories.

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