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Mondetta Clothing prepared its annual financial statements dated December 31. The company used the FIFO inventory...

Mondetta Clothing prepared its annual financial statements dated December 31. The company used the FIFO inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary income statement follows:


    
  Net Sales $ 436,000
  Cost of Goods Sold
    Beginning Inventory $ 49,000
    Purchases 281,000
  
      Goods Available for Sale

330,000
    Ending Inventory (FIFO cost) 95,760
  
      Cost of Goods Sold 234,240
  
  Gross Profit 201,760
  Operating Expenses 97,000
  
  Income from Operations 104,760
  Income Tax Expense (30%) 31,428
  
  Net Income $ 73,332
  


   Assume that you have been asked to restate the financial statements to incorporate LCM. You have developed the following data relating to the ending inventory:


Acquisition Cost

 Market Value per Unit
Item Quantity Per Unit Total
A 3,800 $ 5.30 $ 20,140 $ 6.80
B 1,900 7.60 14,440 3.80
C 7,800 3.80 29,640 6.80
D 3,800 8.30 31,540 5.30
$ 95,760


Required:
1.

Restate the income statement to reflect LCM valuation of the ending inventory. Apply LCM on an item-by-item basis.


2.

Compare the LCM effect on each amount that was changed in requirement 1. (Decreases should be indicated by a minus sign.)

Solutions

Expert Solution

Ending Inventory LCM Valuation :-

Item Qty. Cost Market Value LCM Total
A 3800 5.30 6.80 5.30 $20140
B 1900 7.60 3.80 3.80 $7220
C 7800 3.80 6.80 3.80 $29640
D 3800 8.30 5.30 5.30 $20140
Total $77140

Income Statement :-

Particulars Amount($) Amount($)
Net Sales 436000
Less : Cost of Goods Sold
Op. Inventory 49000
Add : Purchases 281000
Less : Ending Inventory(LCM Basis) (77140) (252860)
Gross Profit 183140
Less : Operating Exp. (97000)
Income from Operations 86140
Less : Income Tax ($86140*30%) (25842)
Net Income 60298

2) LCM Effect on Each Amount :-

Item Changed FIFO LCM Increase or Decrease
Ending Inventory $95760 $77140 Decrease
Cost of Goods Sold $234240 $252860 Increase
Gross Profit $201760 $183140 Decrease
Income from Operatiions $104760 $86140 Decrease
Income Tax $31428 $25842 Decrease
Net Income $73332 $60298 Decrease

ekkarill92 answered 1 year ago
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