Metlock Home Improvement Company installs replacement siding, windows, and louve
ID: 2562392 • Letter: M
Question
Metlock 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, 2017. Jim Alcide, controller for Metlock, has gathered the following data concerning inventory. At May 31, 2017, the balance in Metlock's Raw Materials Inventory account was $505,920, and Allowance to Reduce Inventory to Market had a credit balance of $28,290. Alcide summarized the relevant inventory cost and market data at May 31, 2017, in the schedule below Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Metlock's May 31, 2017, financial statements for inventory at lower-of cost-or-market as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle. Assume Garcia uses LIFO inventory costing. Normal Profit $6,324 9,176 22,940 19,096 $57,536 Replacement Cost Net Realizable Aluminum siding Cedar shake siding Louvered glass doors Thermal windows 98,456 153,760 156,240 $505,920 $485,956 Cost $86,800 $77,500 106,640 138,880 173,600 Sales Price $79,360 116,560 231,136 191,952 $619,008 Value $69,440 105,152 208,692 173,600 $556,884 Total (a1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017 Balance in the Allowance to Reduce Inventory to Market (a2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market. The amount of the gain (loss) Click if you would like to Show Work for this question:Explanation / Answer
Valuation of inventory under the LCNRV rule (applied to each item in inventory) will be lower of Cost and Net Realisable Value. It is calculated as Under:
Therefore, Inventory should be valued at 4,63,504.
Reduction in Inventory from Historical Cost = 4,81,440 - 4,63,504
= 17,936
Therefore, Allowance to Reduce Inventory to NRV should be 17,936.
As such reduction in Allowance = 27,240 - 17,936
= 9,304 (Dr.)
Therefore, proper balance in Allowance to Reduce Inventory to NRV at May 31, 2017 = 17,936
Amount of Gain recorded due to reduction in Allowance to Reduce Inventory to NRV is 9,304.
Inventory Cost Net Realisable Value Valuation Aluminum siding 82,600 66,080 66,080 Cedar shake siding 1,01,480 1,00,064 1,00,064 Louvered glass doors 1,32,160 1,98,594 1,32,160 Thermal windows 1,65,200 1,65,200 1,65,200 Total 4,81,440 4,63,504