Acc422 Week 2

timer Asked: May 6th, 2013

Question description

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

For Decks

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.

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