Question
Shrimp Hurricane Helper Company installs three tyes of hurricane shutters (standard, accordian, and roll top) for single-family homes and condominium complexes along the Lousiana coast.
Shrimp Hurricane Helper Company installs three tyes of hurricane shutters (standard, accordian, and roll top) for single-family homes and condominium complexes along the Lousiana coast. The company is in the process of preparing its annual financial state ments for the fiscal year ended March 31, 2017, and the controller for Shrimp has gathered the following data concerning inventory. At March 31, 2017, the balance in Shrimps Finished Goods Inventory account was $645,000, and the Allowance to Reduce Inventory to NRV had a credit balance of $30,600. The relevant inventory cost and market data at March 31, 2017, is summarized in the schedule below. The controller assigned an intern from a local university the task of calculating the amount that should appear on Shrimps March 31, 2017, financial statements for inventory under the LCNRV rule as applied to each item in inventory. The intern was not comfortable with the departure from the cost principle. Cost Replacement Cost Sales Price Net Realizable Value Normal Profit Standard $181,000 $152,000 $158,000 $151,000 $15,000 Accordian 254,000 249,800 275,000 262,500 27,800 Roll top 210,000 214,000 216,400 206,000 19,200 Total $645,000 $615,800 $649,400 $619,500 $62,000 (b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.
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