PB7-2 Evaluating the Income Statement and Income Tax Effects of Lower of Cost or Market [LO 7-4]

Mondetta Clothing 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:

Net Sales				$	438,000
Cost of Goods Sold
Beginning Inventory	$	49,500
Purchases		282,000
Goods Available for Sale		331,500
Ending Inventory (FIFO cost)		99,840
Cost of Goods Sold					231,660
Gross Profit					206,340
Operating Expenses					97,500
Income from Operations					108,840
Income Tax Expense (40%)					43,536
Net Income				$	65,304

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:

Acquisition Cost

Market Value per Unit

Item

Quantity

Per Unit

Total

A

3,900

$

5.40

$

21,060

$

6.90

B

1,950

7.80

15,210

3.90

C

7,900

3.90

30,810

6.90

D

3,900

8.40

32,760

5.40

$

99,840

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

2.

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