Question

Jaffa Company prepared its annual financial statements dated December 31 of the current year. The company applies the FIFO inventory costing method; however, the company neglected to apply lower of cost or net realizable value to the ending inventory. The preliminary current year income statement follows: Sales revenue $298,000 Cost of goods sold Beginning inventory $ 34,800 Purchases 202,000 Goods available for sale 236,800 70,256 Ending inventory (FIFO cost) Cost of goods sold Gross profit Operating expenses 166,544 131,456 63,800 Pretax income 67,656 Income tax expense (30%) 20,297 $47,359 Net income Assume that you have been asked to restate the current year financial statements to incorporate lower of cost or NRV. You have developed the following data relating to the current year ending inventory Acquisition Cost Net Realizable Quantity Unit Item Total Value Per Unit 3,230 1,680 7,280 $4.80 $15,504 7,224 31,304 16,224 $3.80 A 4.30 5.80 B 2.30 6.80 4.30 C 4.80 3,380 $ 70,256

Answer 1

Working notes:

Item	Quantity	Cost	NRV	Lower of cost or NRV	Total
A	3,230	$4.80	$3.80	$3.80	$12,274
B	1,680	4.30	5.80	4.30	7,224
C	7,280	4.30	2.30	2.30	16,744
D	3,380	4.80	6.80	4.80	16,224
Total					$52,466

JAFFA COMPANY Income Statement (Corrected) For The Year Ended December 31, Current Year
Sales revenue		$298,000
Less: Cost of goods sold:
Beginning inventory	$34,800
Purchases	202,000
Goods available for sale	236,800
Ending inventory	52,466
Cost of goods sold		184,334
Gross profit		113,666
Operating expenses		63,800
Pretax income		49,866
Income tax expense (30%)		14,960
Net income		$34,906

Item changed	FIFO cost basis	Lower of Cost or NRV	Amount of change (Decrease)
Ending inventory	$70,256	$52,466	-$17,790
Cost of goods sold	166,544	184,334	17,790
Gross profit	131,456	113,666	-17,790
Pretax income	67,656	49,866	-17,790
Income tax expense	20,297	14,960	-5,337
Net income	47,359	34,906	-12,453