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					$	138,000
Cost of Goods Sold
Beginning Inventory	$	14,500
Purchases		90,000
Goods Available for Sale		104,500
Ending Inventory		24,900
Cost of Goods Sold						79,600
Gross Profit						58,400
Operating Expenses						30,500
Income from Operations						27,900
Income Tax Expense (30%)						8,370
Net Income					$	19,530

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		2,050		$	2.90			$	5,945			$	3.90
B		700			3.50				2,450				1.90
C		3,400			1.90				6,460				0.95
D		2,050			4.90				10,045				2.90
								$	24,900

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.

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					$	138,000
Cost of Goods Sold
Beginning Inventory	$	14,500
Purchases		90,000
Goods Available for Sale		104,500
Ending Inventory		24,900
Cost of Goods Sold						79,600
Gross Profit						58,400
Operating Expenses						30,500
Income from Operations						27,900
Income Tax Expense (30%)						8,370
Net Income					$	19,530

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		2,050		$	2.90			$	5,945			$	3.90
B		700			3.50				2,450				1.90
C		3,400			1.90				6,460				0.95
D		2,050			4.90				10,045				2.90
								$	24,900

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.

Answer 1

Computation of Ending Inventory on LCM/NRV Basis
Item	Quantity	Cost Per Unit (A)	Market Value (B)	LCM/NRV per unit (C )	Ending Inventory on LCM basis (Quantity * C)
A	2050	$          2.90	$           3.90	$          2.90	$         5,945.00
B	700	$          3.50	$           1.90	$          1.90	$         1,330.00
C	3400	$          1.90	$           0.95	$          0.95	$         3,230.00
D	2050	$          4.90	$           2.90	$          2.90	$         5,945.00
Total					$       16,450.00
Springer Anderson Gymnastics
Income Statement (LCM/NRV basis)
For the year ended December 31
Sales Revenue		$1,38,000
Cost of goods sold
Beginning Inventory	$ 14,500.00
Purchases	$ 90,000.00
Goods available for sale	$1,04,500
Ending Inventory	$ 16,450.00
Cost of Goods sold		$ 88,050.00
Gross profit		$ 49,950.00
Operating Expense		$ 30,500.00
Income from Operations		$ 19,450.00
Income Tax expense (30%)		$   5,835.00
Net Income		$ 13,615.00
Items Changed	LIFO	LCM	Inc ( Dec)
Ending inventory	$ 24,900.00	$ 16,450.00	$   -8,450.00
Cost of goods sold	$ 79,600.00	$ 88,050.00	$    8,450.00
Gross Profit	$ 58,400.00	$ 49,950.00	$   -8,450.00
Income from Operation	$ 27,900.00	$ 19,450.00	$   -8,450.00
Income Tax expense	$   8,370.00	$   5,835.00	$   -2,535.00
Net Income	$ 19,530.00	$ 13,615.00	$   -5,915.00