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				$	296,000
Cost of goods sold
Beginning inventory	$	34,600
Purchases		200,000
Goods available for sale		234,600
Ending inventory (FIFO cost)		66,794
Cost of goods sold					167,806
Gross profit					128,194
Operating expenses					63,600
Pretax income					64,594
Income tax expense (35%)					22,608
Net income				$	41,986

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
Item	Quantity	Unit		Total		Net Realizable Value Per Unit
A	3,210	$	4.60	$	14,766	$	3.60
B	1,660		4.10		6,806		5.60
C	7,260		4.10		29,766		2.10
D	3,360		4.60		15,456		6.60
				$	66,794

Required:

1. Prepare the income statement to reflect lower of cost or net realizable value valuation of the current year ending inventory. Apply lower of cost or NRV on an item-by-item basis. (Round your answers to nearest dollar amount.)

JAFFA COMPANY

Income Statement (Corrected)

For the Year Ended December 31,

Current YearCost of goods sold:

Goods available for sale

Cost of goods sold

Pretax income

2. Compare the lower of cost or net realizable value effect on each amount that was changed on the income statement in requirement (1). (Decreases should be indicated by a minus sign.)(Round your answers to nearest dollar amount.)

	Item Changed FIFO Cost Basis Lower of Cost or NRV Amount of Change (Decrease) Ending inventory Cost of goods sold Gross profit Pretax income Income tax expense Net income

Answer 1

JAFFA COMPANY
1.Income statement(LCM basis)
for the year ended dec 31
Sales revenue		296,000
Cost of goods sold
Beginning inventory	34,600
Purchases	200,000
Goods available for sale	234,600
Ending inventory	49,064
Cost of goods sold		185,536
Gross profit		110,464
Operating expenses		63,600
Pretax income		46,864
Income tax expense at 30%		14,059
Net Income		32,805

LCM effect
Item changed	FIFO COST BASIS	LCM BASIS	amount of increase (decrease)
ending inventory	66,794	49,064	-17,730
cost of goods sold	167,806	185,536	17,730
Gross profit	128,194	110,464	-17,730
Pretax income	64,594	46,864	-17,730
income tax expense	22,608	14,059	-8549
Net income	41,986	32,805	-9181

LCM item by item basis

item (a)	Qty (b)	acquisition cost per unit (c)	total (d=b*c)	market value per unit (e)	total market value (f=b*e)	LCM (g=lower of d or f
A	3210	4.6	14766	3.6	11556	11556
B	1660	4.1	6806	5.6	9296	6806
C	7260	4.1	29766	2.1	15246	15246
D	3360	4.6	15456	6.6	22176	15456
Total			66794		58274	49064