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Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory...

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 $ 126,000
Cost of Goods Sold
Beginning Inventory $ 11,500
Purchases 84,000
Goods Available for Sale 95,500
Ending Inventory 21,400
Cost of Goods Sold 74,100
Gross Profit 51,900
Operating Expenses 27,500
Income from Operations 24,400
Income Tax Expense (40%) 9,760
Net Income $ 14,640

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 2,350 $ 2.30 $ 5,405 $ 3.30
B 750 3.00 2,250 1.40
C 2,800 1.30 3,640 0.70
D 2,350 4.30 10,105 2.30
$ 21,400


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.

Solutions

Expert Solution

Part -(1) Springer Anderson Gymnastics
Income statement (LCM/NRV basis)
For the year ended December 31
Particulars Amount ($)
Sales revenue                     126,000
Cost of goods sold:
Beginning inventory                   11,500
Purchases                   84,000
Goods Available for Sale                   95,500
Note 1 Ending Inventory                   13,820
Cost of goods sold                       81,680
Gross profit                       44,320
Operating expenses                       27,500
Income from operations                       16,820
      Income tax expenses (16,820*40%)                         6,728
Net income                       10,092
Part -(2) Comparison of LCM effect:-
Item changed LIFO Cost basis LCM/NRV basis Amount of change Increase (Decrease)
Ending Inventory                   21,400                       13,820                                          (7,580)
Cost of goods sold                   74,100                       81,680                                           7,580
Gross profit                   51,900                       44,320                                          (7,580)
Income from operations                   24,400                       16,820                                          (7,580)
Income tax expenses                     9,760                         6,728                                          (3,032)
Net income                   14,640                       10,092                                          (4,548)
We can see that Ending Inventory, Cost of goods sold, Gross profit, Income from operations, Income tax expenses and net income each got changed due to the change in method of valuation of inventory.
Note 1 Computation of ending inventory on LCM basis:
Item Original Unit cost Replacement cost per unit LCM per unit Quantity LCM valuation
A                       2.30                           3.30                                             2.30                                                         2,350              5,405
B                       3.00                           1.40                                             1.40                                                            750              1,050
C                       1.30                           0.70                                             0.70                                                         2,800              1,960
D                       4.30                           2.30                                             2.30                                                         2,350              5,405
LCM Inventory Valuation            13,820

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