Determine proper balance in allowance to reduce inventory

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Reference no: EM131394115

Q1. Gross Profit Method

Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May:

Inventory, May 1	$ 160,000
Purchases (gross)	640,000
Freight-in	30,000
Sales revenue	1,000,000
Sales returns	70,000
Purchase discounts	12,000

Instructions:

(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.

(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Q2. LCNRV

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, 2017. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.

At May 31, 2017, 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, 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 Garcia's May 31, 2017, 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	186,000	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, 2017.

(b) For the fiscal year ended May 31, 2017, 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.

Q3: Lower-of-Cost-or-Market

Referring to the situation in Q2 for Garcia Home Improvement Company, consider the following expanded data at May 31, 2017. Assume Garcia uses LIFO inventory costing, and that the Allowance to Reduce Inventory to NRV had a credit balance of $27,500 on May 31, 2017 before adjustment.

	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

Instructions (CMA adapted)

(a) (1) Determine the proper balance in Allowance to Reduce Inventory to Market at May 31, 2017.

(2) 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.

(1) Calculation of the Allowance to Reduce Inventory to Market account at May 31, 2017:

Inventory item	Cost	Replacement Cost	NRV (Ceiling)	NRV less normal profit (Floor)	LCM
Aluminum siding	$70,000	$62,500	$56,000
Cedar shake siding	86,000	79,400	84,800
Louvered glass doors	112,000	124,000	168,300
Thermal windows	140,000	126,000	140,000
Totals	$408,000	$391,900	$449,100

Calculation of Allowance balance at May 31, 2017:

(2) Calculation of loss to be recorded:

(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.

Q4. Retail Inventory Method

The records for the Clothing Department of Sharapova's Discount Store are summarized below for the month of January.

		At Retail	At Cost
Inventory, January 1		$ 25,000	17,000
Purchases in January		137,000	82,500
Freight-in			7,000
Purchase returns		3,000	2,300
Transfers in from suburban branch		13,000	9,200
Inventory losses due to normal breakage, etc		400
Sales revenue		95,000
Sales returns		2,400
Net markups	$ 8,000
Net markdowns	4,000

Instructions:

(a) Compute the inventory for this department as of January 31, at retail prices.

(b) Compute the ending inventory using lower-of-average-cost-or-market.

Reference no: EM131394115

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