96 weans contany uses the leveer orco t or market methoc on

9-6 weans contany uses the leveer orco t or market methoc, on an ndvidual item, tasas \", prking ts \"we tory ten s. The r vert ory at Decem nr 31 201 3 Relevant per-unit data for product X appear below n uded prokxt x. $81 71 cost pr There were 1,136 units of product X on hand at December 31, 2013. Product X was incorrectly valued at $70 per unit for reporting purposes. All 1,136 units were sold in 2014. Compute the effect of this error on net income for 2013 and the effect on net income for 2014, and indicate the direction of the misstatement for each year Net it for 2013 Net income for 2014

Solution

Original Cost of Inventory per unit is Lower of Market or Cost

Cost of Inventory = 1136 * $71 = $80656

Market Value of Inventory = 1136 * ($81 - $14 - $9) = $65888

Inventory Value Should be $65888

As the Inventory is valued at $70 Net Income for 2013 is Overstated by $12 * 1136 Units = $13632

As the Inventory is valued at $70 Net Income for 2014 is Understated by $12 * 1136 Units = $13632