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:

331,500

   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

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.)

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:

Explanation / Answer

Part 1

Income statement (LCM badis)

For the year ended 31 December

For ending inventory for all items lowest of cost and market value of per unit of ending inventory will be considered

Item A-5.40

Item B - 3.90

Item C - 3.90

Item D - 5.40

Ending inventory = (3900*5.40)+(1950*3.90)+(7900*3.90)+(3900*5.40)=80535

Part 2

Net sales 438000 Cost of goods sold : Beginning inventory 49500 Purchase 282000 Goods available for sale 331500 Ending inventory 80535 Cost of goods sold 250965 Gross profit 187035 Operating expenses 97500 Income from operations 89535 Income tax expenses (40%) 35814 Net income 53721

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