CP7-2 Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market [LO 7-4]

Smart Company 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				$	320,000
Cost of Goods Sold
Beginning Inventory	$	50,000
Purchases		222,000
Goods Available for Sale		272,000
Ending Inventory (FIFO cost)		92,500
Cost of Goods Sold					179,500
Gross Profit					140,500
Operating Expenses					81,000
Income from Operations					59,500
Income Tax Expense (30%)					17,850
Net Income				$	41,650

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:

				Purchase Cost						Market Value per Unit
Item	Quantity			Per Unit			Total
A		3,900		$	7		$	27,300		$	8
B		1,700			4			6,800			2
C		9,000			4			36,000			6
D		3,200			7			22,400			4
							$	92,500

TIP: Inventory write-downs do not affect the cost of goods available for sale. Instead, the effect of the write-down is to reduce ending inventory, which increases Cost of Goods Sold and then affects other amounts reported lower in the income statement.

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