PA7 2 (Algo) Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market Net Realizable Value LO 7 4 Springer Anderson Gymnastics prepared its annual financial statements dated December 31 The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost) The preliminary income statement follows Sales Revenue $ 124,000 Cost of Goods Sold Beginning Inventory $ 11,000 Purchases 83,000 Goods Available for Sale 94,000 Ending Inventory 20,700 Cost of Goods Sold 73,300 Gross Profit 50,700 Operating Expenses 27,000 Income from Operations 23,700 Income Tax Expense (35 ) 8,295 Net Income $ 15,405 Assume that you have been asked to restate the financial statements to incorporate the LCM NRV rule You have developed the following data relating to the ending inventory Purchase Cost Item Quantity Per Unit Total Replacement Cost per Unit A 2,400 $ 2 20 $ 5,280 $ 3 20 B 700 3 00 2,100 1 20 C 2,700 1 20 3,240 60 D 2,400 4 20 10,080 2 20 $ 20,700 Required Restate the income statement to reflect LCM NRV valuation of the ending inventory Apply LCM NRV on an item by item basis Compare the LCM NRV effect on each amount that was changed in the preliminary income statement in requirement 1 Restate the income statement to reflect LCM NRV valuation of the ending inventory Apply LCM NRV on an item by item basis SPRINGER ANDERSON GYMNASTICS Income Statement (LCM NRV basis) For the Year Ended December 31 Sales Revenue $124,000 Cost of Goods Sold Beginning Inventory $11,000 Purchases 83,000 Goods Available for Sale 94,000 Ending Inventory Cost of Goods Sold Gross Profit Operating Expenses 27,000 Income from Operations Income Tax Expense Net Income Compare the LCM NRV effect on each amount that was changed in the preliminary income statement in requirement 1 (Decreases should be indicated by a minus sign ) Item Changed LIFO Cost Basis LCM NRV Basis Amount of Increase (Decrease) Ending Inventory Cost of Goods Sold Gross Profit Income from Operations Income Tax Expense Net Income

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PA7-2 (Algo) Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market/Net Realizable Value [LO 7-4] Springer Anderson Gymnastics prepared its

PA7-2 (Algo) Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market/Net Realizable Value [LO 7-4]

Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows:

Sales Revenue		$ 124,000
Cost of Goods Sold
Beginning Inventory	$ 11,000
Purchases	83,000
Goods Available for Sale	94,000
Ending Inventory	20,700
Cost of Goods Sold		73,300
Gross Profit		50,700
Operating Expenses		27,000
Income from Operations		23,700
Income Tax Expense (35%)		8,295
Net Income		$ 15,405

Assume that you have been asked to restate the financial statements to incorporate the LCM/NRV rule. You have developed the following data relating to the ending inventory:

		Purchase Cost
		Item	Quantity		Per Unit	Total	Replacement Cost per Unit
A	2,400	$ 2.20	$ 5,280	$ 3.20
B	700	3.00	2,100	1.20
C	2,700	1.20	3,240	.60
D	2,400	4.20	10,080	2.20
			$ 20,700

Required:

Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.

Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1.

Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.

SPRINGER ANDERSON GYMNASTICS
Income Statement (LCM/NRV basis)
For the Year Ended December 31
Sales Revenue		$124,000
Cost of Goods Sold:
Beginning Inventory	$11,000
Purchases	83,000
Goods Available for Sale	94,000
Ending Inventory
Cost of Goods Sold
Gross Profit
Operating Expenses		27,000
Income from Operations
Income Tax Expense
Net Income

Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1. (Decreases should be indicated by a minus sign.)

Item Changed	LIFO Cost Basis	LCM/NRV Basis	Amount of Increase (Decrease)
Ending Inventory
Cost of Goods Sold
Gross Profit
Income from Operations
Income Tax Expense
Net Income