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Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company used the FIFO...

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.

Solutions

Expert Solution

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

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