Question

Springer Anderson Gymnastics prepared its annual financial statements dated December 31. The company reported its inventory using the LIFO inventory costing method but did not compare the cost of its ending inventory to its market value (replacement cost). The preliminary income statement follows $124,000 Sales Revenue Cost of Goods Sold Beginning Inventory $11,000 83,000 Purchases 94,000 20,700 Goods Available for Sale Ending Inventory 73,300 50,700 27,000 23,700 8,295 15,405 Cost of Goods Sold Gross Profit Operating Expenses Income from Operations Income Tax Expense (35%) Net Income Assume that you have been asked to restate the financial statements to incorporate the LCM/NRV rule. You have developed the following data relating to the ending inventory: Purchase Cost Total $5,280 2,100 3,240 10,080 $20,700 Replacement Cost per Unit $3.20 1.20 0.60 2.20 Item Quantity 2,400 700 2,700 2,400 Per Unit $2.20 3.00 1.20 4.20 Required 1. Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis 2. Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1 Required 1Required 2 Restate the income statement to reflect LCM/NRV valuation of the ending inventory. Apply LCM/NRV on an item-by-item basis SPRINGER ANDERSON GYMNASTICS Income Statement (LCM/NRV basis) For the Year Ended December 31 Sales Revenue 124,000 Cost of Goods Sold $11,000 83,000 94,000 20,700 Beginning Inventory Purchases Goods Available for Sale Ending Inventory 73,300 50,700 27,000 23,700 8,295 $15,405 Cost of Goods Sold Gross Profit Operating Expenses Income from Operations Income Tax Expense Net Income Required1 Required 2 Answer is not complete Complete this question by entering your answers in the tabs below Required 1Required 2 Compare the LCM/NRV effect on each amount that was changed in the preliminary income statement in requirement 1. (Decreases should be indicated by a minus sign.) Cost LCMINRVAmount of Basis LIFO Item Changed Increase Basis (Decrease) Ending Inventory Cost of Goods Sold Gross Profit Income from Operations Income Tax Expense Net Income

Answer 1

Solution 1:

Computation of Ending Inventory on LCM/NRV Basis
Item	Quantity	Cost per unit	Replacement Cost per unit	LCM/NRV per unit	Ending Inventory on LCM basis (Quantity*LCM/NRV)
A	2400	$2.20	$3.20	$2.20	$5,280
B	700	$3.00	$1.20	$1.20	$840
C	2700	$1.20	$0.60	$0.60	$1,620
D	2400	$4.20	$2.20	$2.20	$5,280
Total					$13,020

Springer Anderson Gymnastics
Income Statement (LCM/NRV basis)
For the year ended December 31
Net Sales		$1,24,000
Cost of goods sold
Beginning Inventory	$11,000
Purchases	$83,000
Goods available for sale	$94,000
Ending Inventory	$13,020
Cost of Goods sold		$80,980
Gross profit		$43,020
Operating Expense		$27,000
Income from Operations		$16,020
Income Tax expense (35%)		$5,607
Net Income		$10,413

Solution 2:

Items Changed	LIFO Cost Basis	LCM/NRV Basis	Amount of Increase (Decrease)
Ending inventory	$20,700	$13,020	-$7,680
Cost of goods sold	$73,300	$80,980	$7,680
Gross Profit	$50,700	$43,020	-$7,680
Income from Operation	$23,700	$16,020	-$7,680
Income Tax expense	$8,295	$5,607	-$2,688
Net Income	$15,405	$10,413	-$4,992