PA72 Evaluating the Income Statement and Income Tax Effects

PA7-2 Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market LO 7-4] Springer Anderson Gymnastics 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 Sales Revenue Cost of Goods Sold $128,000 Beginning Inventory Purchases $12,000 85,000 Goods Available for Sale Ending Inventory (FIFO cost) 97,000 21,800 Cost of Goods Sold 75,200 Gross Profit Operating Expenses 52,800 28,000 24,800 7,440 Income from Operations Income Tax Expense (30%) Net Income $ 17,360 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: Market Value per Unit $3.40 1.40 0.70 2.40 Purchase Cost Item Quantity Per Unit Total 2,300 700 2,900 2,300 $2.40 3.00 5,520 2,100 4,060 10,120 1.40 4.40 $21,800

Solution

Inventory valuation under LCM Item Cost Market Value LCM A 5520 7,820 5,520 B 2100 980 980 C 4,060 2,030 2,030 D 10120 5520 5520 Ending Inventory 14050 Req 1: Income Statement Sales revenue 128000 Less: Cost of Good ssold Beginning Inventory 12000 Purchases 85000 Cost of goods available 97000 Ending Inventory 14050 Costt of Good sold 82950 Gross margin 45050 Operating expense 28000 Income from operationg 17050 Income tax 5115 Net Income 11935 Req 2: Item Changed FIFO LCM Amount of Increase / (Decrease) Ending Inventory 21800 14050 -7750 Cost of Goods sold 75200 82950 7750 Gross profit 52800 45050 -7750 Income from Operations 24800 17050 -7750 Income tax expense 7440 5115 -2325 Nnet income 17360 11935 -5425