PB7-2 Evaluating the Income Statement and Income Tax Effects of Lower of Cost or

Question

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 Cost of Goods Sold $ 432,000 Beginning Inventory Purchases $48,000 279,000 Goods Available for Sale Ending Inventory (FIFO cost) 327,000 87,840 Cost of Goods Sold 239,160 Gross Profit Operating Expenses 192,840 96,000 Income from Operations Income Tax Expense (30%) 96,840 29,052 Net Income 67,788 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: Market Value per Unit Acquisition Cost Item QuantityPer Unit Total 3,600 1,800 7,600 3,600 $5.10 7.20 3.60 8.10 S 18,360 $6.60 3.60 6.60 5.10 12,960 27,360 29,160 $87,840

Explanation / Answer

1) INCOME STATEMENT (LCM BASIS) Net sales 432000 Cost of goods sold: Beginning inventory 48000 Purchases 279000 Goods available for sale 327000 Ending inventory 70560 Cost of goods sold 256440 Gross profit 175560 Operating expenses 96000 Income from operations 79560 Income tax expense (30%) 23868 Net income 55692 2) Item changed FIFO LCM Amount of Increase (Decrease) Ending inventory 87840 70560 -17280 Cost of goods sold 239160 256440 17280 Gross profit 192840 175560 -17280 Income from operations 96840 79560 -17280 Income tax expense 29052 23868 -5184 Net Income 67788 55692 -12096

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