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 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, for inventory under the LCNRV rule as applied to each item in inventory. Devereaux expressed concern over departing from the historical cost principle.
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.
