Problem 9-4

Bonita 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 Bonita, has gathered the following data concerning inventory. At May 31, 2017, the balance in Bonitas Raw Materials Inventory account was $420,240, and Allowance to Reduce Inventory to Market had a credit balance of $27,690. 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 Bonitas 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.

Cost Replacement Cost Sales Price Net Realizable Value Normal Profit Aluminum siding $72,100 $64,375 $65,920 $57,680 $5,253 Cedar shake siding 88,580 81,782 96,820 87,344 7,622 Louvered glass doors 115,360 127,720 191,992 173,349 19,055 Thermal windows 144,200 129,780 159,444 144,200 15,862 Total $420,240 $403,657 $514,176 $462,573 $47,792

(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) $

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