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
			Acquisition Cost
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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