P7-6 (Algo) Evaluating the Income Statement and Cash Flow Effects of Lower of Cost or Net Realizable Value LO7-4 [The following information applies to the questions displayed below.) Jaffa Company prepared its annual financial statements dated December 31 of the current year. The company applies the FIFO inventory costing method; however, the company neglected to apply lower of cost or net realizable value to the ending inventory. The preliminary current year income statement follows: $285,000 $ 33,500 189,000 222,500 54,800 Sales revenue Cost of goods sold Beginning inventory Purchases Goods available for sale Ending inventory (FIFO cost) Cost of goods sold Gross profit Operating expenses Pretax income Income tax expense (40%) Net income 167, 700 117,300 62,500 54,800 21,920 $ 32,880 Assume that you have been asked to restate the current year financial statements to incorporate lower of cost or NRV. You have developed the following data relating to the current year ending inventory: Item Unit A B D Quantity 3,100 1,550 7,150 3,250 $3.50 5.50 2.00 6.50 Acquisition Cost Total $ 10,850 8, 525 14,300 21,125 $ 54,800 Net Realizable Value Per Unit $ 4.50 4.00 4.00 4.50 Required: 1. Prepare the income statement to reflect lower of cost or net realizable value valuation of the current year ending inventory. Apply lower of cost or NRV on an item-by-item basis. (Round your answers to nearest dollar amount.) JAFFA COMPANY Income Statement (Corrected) For the Year Ended December 31, Current Year Sales revenue 285,000 Cost of goods sold: Beginning inventory Purchases 33,500 189,000 Goods available for sale Ending inventory 222,500 45,975 Cost of goods sold Gross profit Operating expenses 62,500 Pretax income Income tax expense Net income