Question

understatted overstated purchase Sales returns 4 Beginning inventory Freight out Purchase discounts Net income is A, undersated 16 B, Understated 26 Given the following information for the ABC company Inventory at end-of-year prices Price index Date $80,000 $120,000 $130,000 100 12/31/16 12/31/17 12/31/18 120 125 Using dollar-value LIFO, the 12/31/18 inventory for the balance sheet is approximately A, $109,000 В, 104,000 C, 110,000

Answer 1

5	Statement showing understatemnt in net income
	Overstatement of purchases	7
	Understatement of sales return	(5)
	Understatement of Opening inventory	(4)
	Overstatement of Freight	15
	Understatement of purchase discount	3
	Net Understatement of net income	16
6	Date	Inventory at year end	Price Index	Inventory at base year prices	Change from prior Year
	12/31/2016	$80,000	100	$80,000	0
	12/31/2017	$120,000	120	$100,000	$20,000
	12/31/2018	$130,000	125	$104,000	$4,000
	Computation of Dollar value Inventory
	12/31/2016:$80,000 @1.00	$80,000
	12/31/2017:$80,000 @1.00	$80,000
	$20,000 @1.20	$24,000
		$104,000
	12/31/2018:$80,000 @1.00	$80,000
	$20,000 @1.20	$24,000
	$4,000 @1.25	$6,000
		$110,000
	So answer is C
7	Calculation of Net realizable value
	Estimated Selling price	$120
	Less:Cost of completion	$13
	Less:Profit margin	$6
	NRV	$101
	Cost(Lower of cost or market price)	$102
	So inventory will be recorded at lower of cost or NRV which is $101
8	Since the company is using allowance method hence it will create provision for bad debts account and any writr-off
	will be taken from provision for bad debts a/c so there will not be any affect on the retained earnings
	So Option B is answer