Metlock Home Improvement Company installs replacement siding, windows, and louve
ID: 2562833 • 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 ot 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 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 low 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. Net Realizable Value $69,440 105,152 208,692 173,600 $556,884 Normal Profit $6,324 9,176 22,940 19,096 $57,536 Replacement Aluminum siding Cedar shake siding Louvered glass doors Thermal windows Cost $86,800 106,640 138,880 173,600 Cost $77,500 98,456 153,760 156,240 Sales Price $79,360 116,560 231,136 191,952 $619,008 Total $505,920 $485,956 (a1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017 Balance in the Allowance to Reduce Inventory to Market 17936 (a2) For the fiscal year ended May 31, 2017, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory to Market. The amount of the gain (loss) 9304Explanation / Answer
Under lower cost or market valuation rules ( LCM), inventory items are written down to market value when the market value is less than the cost of the items.
Here Cost means Historical cost or intial cost recorded in the books
Rule for determination of market value : Replacement cost is regarded as Market value, except under two conditions.
Valuation of Inventory on the basis of LCM rule on each item of Inventory
Lower of Cost or Market Value ($)
Answer a1)
Balance in Allowance to reduce Inventory to NRV at May ,2017 =
Cost of Inventory - Value of inventory as per LCM rule
= $505,920 - $ 480,376 = $25,544
Answer 12)
Amount of Gain (loss) due to change in Balance in Allowance to reduce Inventory to NRV at May ,2017
= Balance prior to adjustment - Correct Closing Balance = $28,290 - $25,544 = $2,746 is to be recorded as gain
items Cost ($) Replacement Cost ($) NRV ($) NRV - Normal profit ($) Market Value ($)Lower of Cost or Market Value ($)
Aluminum siding 86,800 77,500 69,440 63,116 69,440 69,440 Cedar shake siding 106,640 98,456 105,152 95,976 98,456 98,456 Louvered glass doors 138,880 153,760 208,692 185,752 185,752 138,880 Thermal windows 173,600 156,240 173,600 154,504 156,240 173,600 Total 505,920 480,376