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, 2015. Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.

At May 31, 2015, 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, 2015, 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, 2015, 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.

Instructions

(a) (1) Determine the proper balance in Allowance to Reduce Inventory to Net Realizable Value at May 31, 2015.
(2) For the fiscal year ended May 31, 2015, 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 Net Realizable Value.

(b) Explain the rationale for the use of the LCNRV rule as it applies to inventories.

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Cost Sales Price Aluminum siding 70,000 64,000 Net Realizable Value 56,000 Cedar shake siding 86,000 94,000 84,800 Louvered glass doors 112,000 186,400 168,300 Thermal windows 140,000 154,800 140,000 Total 408,000 499,200 449,100