Question

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					$	128,000
Cost of Goods Sold
Beginning Inventory	$	12,000
Purchases		85,000
Goods Available for Sale		97,000
Ending Inventory		21,800
Cost of Goods Sold						75,200
Gross Profit						52,800
Operating Expenses						28,000
Income from Operations						24,800
Income Tax Expense (30%)						7,440
Net Income					$	17,360

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		2,300		$	2.40			$	5,520			$	3.40
B		700			3.00				2,100				1.40
C		2,900			1.40				4,060				0.70
D		2,300			4.40				10,120				2.40
								$	21,800

Required:

1. Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.
2. Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1.
   1. LIFO cost, LCM/NRV basis and amount of increase (decrease) for ending inventory, cost of goods sold, gross profit, income from operations, income tax expense, net income

Answer 1

Solution 1:

Computation of Ending Inventory on LCM/NRV Basis
Item	Quantity	Cost per unit	Replacement Cost per unit	LCM/NRV per unit	Ending Inventory on LCM basis (Quantity*LCM/NRV)
A	2300	$2.40	$3.40	$2.40	$5,520
B	700	$3.00	$1.40	$1.40	$980
C	2900	$1.40	$0.70	$0.70	$2,030
D	2300	$4.40	$2.40	$2.40	$5,520
Total					$14,050

Springer Anderson Gymnastics
Income Statement (LCM/NRV basis)
For the year ended December 31
Net Sales		$1,28,000
Cost of goods sold
Beginning Inventory	$12,000
Purchases	$85,000
Goods available for sale	$97,000
Ending Inventory	$14,050
Cost of Goods sold		$82,950
Gross profit		$45,050
Operating Expense		$28,000
Income from Operations		$17,050
Income Tax expense (30%)		$5,115
Net Income		$11,935

Solution 2:

Items Changed	LIFO Cost Basis	LCM/NRV Basis	Amount of Increase (Decrease)
Ending inventory	$21,800	$14,050	-$7,750
Cost of goods sold	$75,200	$82,950	$7,750
Gross Profit	$52,800	$45,050	-$7,750
Income from Operation	$24,800	$17,050	-$7,750
Income Tax expense	$7,440	$5,115	-$2,325
Net Income	$17,360	$11,935	-$5,425