PA7-2 (Algo) Evaluating the Income Statement and Income Tax Effects of Lower of Cost or...
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PA7-2 (Algo) Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market/Net Realizable Value [LO 7-4]
Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows:
Sales Revenue
$ 120,000
Cost of Goods Sold
Beginning Inventory
$ 10,000
Purchases
81,000
Goods Available for Sale
91,000
Ending Inventory
18,800
Cost of Goods Sold
72,200
Gross Profit
47,800
Operating Expenses
26,000
Income from Operations
21,800
Income Tax Expense (30%)
6,540
Net Income
$ 15,260
Assume that you have been asked to restate the financial statements to incorporate the LCM/NRV rule. You have developed the following data relating to the ending inventory:
Purchase Cost
Item
Quantity
Per Unit
Total
Replacement Cost per Unit
A
2,500
$ 2.00
$ 5,000
$ 3.00
B
650
2.00
1,300
1.00
C
2,500
1.00
2,500
.50
D
2,500
4.00
10,000
2.00
$ 18,800
Required:
Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.
Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1.
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