Smart Company pre inventory costing method, but it failed to apply LCM to the en

Question

Smart Company pre inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary income statement follows: pared its annual financial statements dated December 31. The company used the FIFO $290,000 Sales Revenue Cost of Goods Sold Beginning Inventory Purchases $35,000 192,000 Goods Available for Sale Ending Inventory (FIFO cost) 227,000 117,500 Cost of Goods Sold 109,500 Gross Profit Operating Expenses 180,500 66,000 Income from Operations Income Tax Expense (30%) 114,500 34,350 Net Income $ 80,150 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 $ 6 Purchase Cost Total Item Quantity Per Unit 2,400 2,000 7,500 3,500 $12,000 18,000 52,500 35,000 $ 5 7 7 10 $117,500

Explanation / Answer

Solution:

Part 1 --

Lower of Cost or Market Value (LCM) is a method of valuation of Inventory. Under this method, the inventory is valued at its original cost or market value whichever is less.

So, we need to first calculate the Inventory Value using LCM approach

Item

Quantity

Purchase Cost Total (COST)

Market Value (Quantity x Market Value Per Unit)

Lower of Cost or Market Value

A

2400

$12,000

14400

$12,000

B

2000

$18,000

14000

$14,000

C

7500

$52,500

67500

$52,500

D

3500

$35,000

24500

$24,500

$117,500

$103,000

Income Statement

Income Statement (LCM basis)

For the Year Ended December 31

Sales Revenue

$290,000

Cost of Goods Sold

Beginning Inventory

$35,000

Purchases

$192,000

Goods Available for Sale

$227,000

Ending Inventory (As calculated above LCM basis)

$103,000

Cost of Goods SOld

$124,000

Gross Profit

$166,000

Operating Expenses

$66,000

Income From Operations

$100,000

Income Tax Expense (30%)

$30,000

Net Income

$70,000

Part 2—LCM Effect

Item Changed

FIFO Cost

LCM Basis

Amount of Increase (Decrease)

Ending Inventory

$117,500

$103,000

-$14,500

Cost of Goods SOld

$109,500

$124,000

$14,500

Gross Profit

$180,500

$166,000

-$14,500

Operating Expenses

$66,000

$66,000

$0

Income From Operations

$114,500

$100,000

-$14,500

Income Tax Expense (30%)

$34,350

$30,000

-$4,350

Net Income

$80,150

$70,000

-$10,150

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Item

Quantity

Purchase Cost Total (COST)

Market Value (Quantity x Market Value Per Unit)

Lower of Cost or Market Value

A

2400

$12,000

14400

$12,000

B

2000

$18,000

14000

$14,000

C

7500

$52,500

67500

$52,500

D

3500

$35,000

24500

$24,500

$117,500

$103,000

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