Problem 9-4 (Essay)
Garcia Home Improvement Company installs replacement siding,windows, and louvered glass doors for single-family homes andcondominium complexes. The company is in the process of preparingits annual financial statements for the fiscal year ended May 31,2017. Jim Alcide, controller for Garcia, has gathered the followingdata concerning inventory.
At May 31, 2017, the balance in Garciaâs Raw Materials Inventoryaccount was $408,000, and Allowance to Reduce Inventory to Markethad a credit balance of $27,500. Alcide summarized the relevantinventory cost and market data at May 31, 2017, in the schedulebelow.
Alcide assigned Patricia Devereaux, an intern from a local college,the task of calculating the amount that should appear on GarciaâsMay 31, 2017, financial statements for inventory atlower-of-cost-or-market as applied to each item in inventory.Devereaux expressed concern over departing from the historical costprinciple. Assume Garcia uses LIFO inventory costing.
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
(b) Explain the rationale for the use of thelower-of-cost-or-market rule as it applies to inventories.
Problem 9-4 (Essay)
Garcia Home Improvement Company installs replacement siding,windows, and louvered glass doors for single-family homes andcondominium complexes. The company is in the process of preparingits annual financial statements for the fiscal year ended May 31,2017. Jim Alcide, controller for Garcia, has gathered the followingdata concerning inventory.
At May 31, 2017, the balance in Garciaâs Raw Materials Inventoryaccount was $408,000, and Allowance to Reduce Inventory to Markethad a credit balance of $27,500. Alcide summarized the relevantinventory cost and market data at May 31, 2017, in the schedulebelow.
Alcide assigned Patricia Devereaux, an intern from a local college,the task of calculating the amount that should appear on GarciaâsMay 31, 2017, financial statements for inventory atlower-of-cost-or-market as applied to each item in inventory.Devereaux expressed concern over departing from the historical costprinciple. Assume Garcia uses LIFO inventory costing.
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 | |||||||
(b) Explain the rationale for the use of thelower-of-cost-or-market rule as it applies to inventories.
