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		$ 120,000
Cost of Goods Sold
Beginning Inventory	$ 10,000
Purchases	81,000
Goods Available for Sale	91,000
Ending Inventory	18,800
Cost of Goods Sold		72,200
Gross Profit		47,800
Operating Expenses		26,000
Income from Operations		21,800
Income Tax Expense (30%)		6,540
Net Income		$ 15,260

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	2,500	$ 2.00	$ 5,000	$ 3.00
B	650	2.00	1,300	1.00
C	2,500	1.00	2,500	.50
D	2,500	4.00	10,000	2.00
			$ 18,800

Required:

1. Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis.
2. Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1.