Partial answer 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				$	146,000
Cost of Goods Sold
Beginning Inventory	$	16,500
Purchases		94,000
Goods Available for Sale		110,500
Ending Inventory (FIFO cost)		25,730
Cost of Goods Sold					84,770
Gross Profit					61,230
Operating Expenses					32,500
Income from Operations					28,730
Income Tax Expense (40%)					11,492
Net Income				$	17,238

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		1,650		$	3.30		$	5,445		$	4.30
B		700			4.00			2,800			2.30
C		3,800			2.30			8,740			1.15
D		1,650			5.30			8,745			3.30
							$	25,730

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

SPRINGER ANDERSON GYMNASTICS
Income Statement (LCM basis)
For the Year Ended December 31
Sales Revenue		$146,000
Cost of Goods Sold:
Beginning Inventory	$16,500
Purchases	94,000
Goods Available for Sale	110,500
Ending Inventory	16,870
Cost of Goods Sold		93,630
Gross Profit		52,370
Operating Expenses		32,500
Income from Operations		19,870
Income Tax Expense
Net Income

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

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