Garcia Home Improvement Company installs replacement siding, windows, and louvered glass doors

P9-2 (Lower-of-Cost-or-Market) 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, 2010, and Jim Alcide, controller for Garcia, has gathered the following data concerning inventory.

At May 31, 2010, 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, 2010, in the schedule below.

Alcide assigned Patricia Devereaux, an intern from a local college, the task of calculating the amount that should appear on Garcia’s May 31, 2010, 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.

Cost replacement sales net realizable normal
Cost price value profit
Aluminum siding $70,000 $62,500 $64,000 $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, 2010.
(2) For the fiscal year ended May 31, 2010, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market.
(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories.
(CMA adapted)

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The Balboa Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one

The Balboa Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 year, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $120,000 per year, using the straight line method.

The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11% and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

a) What is the initial net cash flow if the new machine is purchased and the old one is replaced?
b) Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made.
c) What are the incremental net cash flows in Years 1 through 5?
d) Should the firm purchase the new machine? Support your answer.
e) In general, how would each of the following factors affect the investment decision, and how should each be treated?
(1) The expected life of the existing machine decreases.
(2) The WACC is not constant but is increasing as Balboa adds more projects into its
capital budget for the year.

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T. Allen Home Improvement Company installs replacement siding, windows, and louvered glass doors for single family homes

P9-2 (Lower-of-Cost-or-Market) T. Allen 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, 2007, and Tim Taylor, controller for T. Allen, has gathered the following data concerning inventory. At May 31, 2007, the balance in T. Allen’s Raw Material Inventory account was $408,000, and the Allowance to Reduce Inventory to Market had a credit balance of $29,500. Taylor summarized the relevant inventory cost and market data at May 31, 2007, in the schedule below. Taylor assigned Patricia Richardson, an intern from a local college, the task of calculating the amount that should appear on T. Allen’s May 31, 2007, financial statements for inventory under the lower-of-cost or-market rule as applied to each item in inventory. Richardson expressed concern over departing from the cost principle.

Replacement Sales Net Realizable Normal
Cost Cost Price Value Profit
Aluminum siding $ 70,000 $ 62,500 $ 64,000 $ 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 140,000 122,000 154,800 140,000 15,400
Total $408,000 $387,900 $499,200 $449,100 $46,400

Instructions
(a) (1) Determine the proper balance in the Allowance to Reduce Inventory to Market at May 31, 2007.
(2) For the fiscal year ended May 31, 2007, determine the amount of the gain or loss that would be recorded due to the change in the Allowance to Reduce Inventory to Market.
(b) Explain the rationale for the use of the lower-of-cost-or-market rule as it applies to inventories


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Flower City Cartridges (FCC) manufactures replacement cartridges for desktop printers

P 12–14: Flower City Cartridges

Flower City Cartridges (FCC) manufactures replacement cartridges for desktop printers. FCC uses standard costs within a job order cost system. In June, FCC purchased 18 gallons of blue ink for $385.20 and produced the following four different cartridge jobs using the blue ink (and other inks, materials, and direct labor):

All four jobs have a blue ink materials standard that calls for four gallons of blue ink per job. Blue ink has a standard cost of $20 per gallon. These were the only jobs calling for blue ink in June. There was no beginning blue ink inventory on June 1.

Required:
Prepare a table that indicates the financial disposition of the historical cost of the blue ink purchased in June. (That is, account for the $385.20 blue ink purchase.)

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