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: $281,000 $ 33,100 185,000 218,100 48,144 Sales revenue Cost of goods sold Beginning inventory Purchases Goods available for sale Ending inventory (FIFO cost) Cost of goods sold Gross profit Operating expenses Pretax income Income tax expense (35%) Net income 169,956 111,044 62,100 48,944 17,130 $ 31,814 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 Unit Total A B с D Quantity 3,060 1,510 7,110 3,210 $ 3.10 5.10 1.60 6.10 $ 9,486 7,701 11,376 19,581 $ 48,144 Net Realizable Value Per Unit $ 4.10 3.60 3.60 4.10

QUESTION

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.)

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.)

Answer 1

1 JAFFA COMPANY Income Statement (Corrected) For the Year Ended December 31, Current Year Sales Revenue $ 281000 Less: Cost of goods sold: Beginning inventory 33,100 Purchases 1,85,000 Goods available for sale 2,18,100 Ending inventory 39,459 Cost of goods sold 1,78,641 Gross profit 1,02,359 Operating expenses 62,100 Pretax income 40,259 Income tax expense (35%) 14,091 Net income $ 26168

2 Lower of Cost Amount of change Item changed FIFO cost basis or NRV (Decrease) Ending inventory $ 48144 $ 39459 $ -8685 Cost of goods sold 1,69,956 1,78,641 8,685 Gross profit 1,11,044 1,02,359 -8,685 Pretax income 48,944 40,259 -8,685 Income tax expense 17,130 14,091 -3,039 Net income 31,814 26,168 -5,646 Working notes: NRV Item A B C D Total Quantity 3,060 1,510 7,110 3,210 Cost $ 3.1 5.1 1.6 6.1 $ 4.1 3.6 3.6 Lower of cost or NRV 3.1 3.6 1.6 4.1 Total $ 9486 5436 11376 13161 $ 39459 4.1

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