Question
Pina Colada Corporation uses the lower of FIFO cost and net realizable value method on an individual item basis, applying the direct method. The inventory
Pina Colada Corporation uses the lower of FIFO cost and net realizable value method on an individual item basis, applying the direct method. The inventory at December 31, 2019, included product AG. Relevant per-unit data for product AG follow:
Estimated selling price | $ | 55 | ||
Cost | 54 | |||
Replacement cost | 58 | |||
Estimated selling expense | 21 | |||
Normal profit | 13 |
There were 1,800 units of product AG on hand at December 31, 2019. Product AG was incorrectly valued at $41 per unit for reporting purposes. All 1,800 units were sold in 2020. Assume that Pina Colada follows ASPE, and answer the following questions.
Was net income for 2020 overstated or understated? By how much?
Indicate whether the current ratio, inventory turnover ratio, and debt to total assets ratio would be overstated, understated, or not affected for the years ended December 31, 2019, and December 31, 2020.
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