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Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors for single-family homes and condominium complexes in northern New Jersey and southern New York. The company is in the process of preparing its annual financial statements for the fiscal year ended May 31, 2014, and Jim Alcide, controller for Garcia, has gathered the following data concerning inventory. (Lower of-Cost-or-Market) At May 31, 2014, the balance in Garcia's Raw Material Inventory account was $408. 000 and the Allowance to Reduce Inventory to Market had a credit balance of $27.500 Alcide summarized the relevant inventory cost and market data at May 31, 2014, in the schedule below. Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appearon Garcia's May 31, 2014, financial statements for inventory under the lower-of-cost-or-market rule as applied to each item in inventory. Devereaux expressed concern over departing from the cost principle. Replacement Net Realizable Cost Cost Sales Price Value Normal Profit Aluminum siding $70.000 $62 500 $54.000 $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: (a) (1) Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2014. Calculations of Proper Balance on the Allowance to Reduce Inventory to Market At May 31, 2014. NRV Tess Replacement NRV normal profit Cost Cost (Ceiling) (Floor) LCM Aluminum siding Amount Amount Amount Amount Amount Cedar shake siding Amount Amount Amount Amount Amount Louvered glass doors Amount Amount Amount Amount Amount Thermal windows Amount Amount Amount Amount Amount Totals Formula Formula Formula Formula Formula Inventory cost Amount LCM valuation Amount Allowance at May 31, 2014 Formula (a) (2) For the fiscal year ended May 31, 2014, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market. Enter text answer here as appropriate Balance prior to adjustment Amount Required balance Amount Loss to be recorded Formula (b) Explain the rationale for the use of the lower of cost or market rule as it applies to inventories.

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