In: Accounting
Springer Anderson Gymnastics prepared its annual financial
statements dated December 31. The company used the FIFO inventory
costing method, but it failed to apply the LC&NRV to the ending
inventory. The preliminary income statement is as
follows:
Sales Revenue | $ | 140,000 | ||||
Cost of Goods Sold | ||||||
Beginning Inventory | $ | 15,000 | ||||
Purchases | 91,000 | |||||
Goods Available for Sale |
106,000 |
|||||
Ending Inventory (FIFO cost) | 22,000 | |||||
Cost of Goods Sold | 84,000 | |||||
Gross Profit | 56,000 | |||||
Operating Expenses | 31,000 | |||||
Income from Operations | 25,000 | |||||
Income Tax Expense (30%) | 7,500 | |||||
Net Income | $ | 17,500 | ||||
Assume that you have been asked to
restate the financial statements to incorporate the LC&NRV. You
have developed the following data relating to the ending
inventory:
Purchase Cost | Current Replacement Cost per Unit (Net Realizable Value) |
|||||||||||
Item | Quantity | Per Unit | Total | |||||||||
A | 1,500 | $ | 3 | $ | 4,500 | $ | 4 | |||||
B | 750 | 4 | 3,000 | 2 | ||||||||
C | 3,500 | 2 | 7,000 | 1 | ||||||||
D | 1,500 | 5 | 7,500 | 3 | ||||||||
$ | 22,000 | |||||||||||
1-a. Restate the income statement to reflect the LC&NRV rule of the ending inventory.
1-b. Apply the lower of cost and net realizable value on an item-by-item basis and show computations.
Applying the lower of cost and net realizable value on an item-by-item basis | |||||
(a) | (b) | (c) | (d) | (e) | (f) = (b)*(e) |
Item | Quantity | Cost Per Unit | Net Realizable Value per unit | Lower of cost or Net realizable value | Total |
A | 1500 | $ 3 | $ 4 | $ 3 | $ 4,500 |
B | 750 | $ 4 | $ 2 | $ 2 | $ 1,500 |
C | 3500 | $ 2 | $ 1 | $ 1 | $ 3,500 |
D | 1500 | $ 5 | $ 3 | $ 3 | $ 4,500 |
Total value of ending inventory | $ 14,000 |
1-a. Restatement of income statement to reflect the LC&NRV rule of the ending inventory. | ||
Sales Revenue | $ 140,000 | |
Cost of Goods Sold | ||
Beginning Inventory | $ 15,000 | |
Purchases | $ 91,000 | |
Goods Available for Sale | $ 106,000 | |
Ending Inventory (FIFO cost) | $ 14,000 | |
Cost of Goods Sold (15000+91000-14000) | $ 92,000 | |
Gross Profit (140000 - 92000) | $ 48,000 | |
Operating Expenses | $ 31,000 | |
Income from Operations (48000 - 31000) | $ 17,000 | |
Income Tax Expense (30%) [17000*30%) | $ 5,100 | |
Net Income (17000 - 5100) | $ 11,900 |