The Bryant Gumbel Company replaces old boat parts with new Coast Guard approved modern parts on existing boats at marinas. Because they are looking at some additional financing the company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2011, and Bryant Gumbel, controller for Bryant Gumbel, has gathered the following data concerning inventory.
At May 31, 2011, the balance in The Bryant Gumbel Company’s Raw Material Inventory account was $408,000, and the Allowance to Reduce Inventory to Market had a credit balance of $29,500.
Gumbel summarized the relevant inventory cost and market data at May 31, 2011, in the schedule below. Gumbel assigned you, an intern from UOP, the task of calculating the amount that should appear on Gumbel ‘s May 31, 2011, financial statements for inventory under the lower of cost or market rule as applied to each item in inventory. Having taking ACC 422 you have expressed concern over departing from the cost principle.
Replacement Net Realizable
Cost Cost Sales Price Value Normal Profit
Boat $ 70,000 $ 62,500 $ 64,000 $ 56,000 $ 5,100
Oak Flooring 86,000 79,400 94,000 84,800 7,400
Rudders 112,000 124,000 186,400 168,300 18,500
Storm 140,000 122,000 154,800 140,000 15,400
Total $408,000 $387,900 $499,200 $449,100 $46,400
OK here is what you need to do, first determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2011, next for the fiscal year ended May 31, 2011, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market and finally, explain the rationale for the use of the lower of cost or market rule as it applies to inventories.