Mondetta Clothing prepared its annual financial statements dated December 31. Th

Question

Mondetta Clothing prepared its annual financial statements dated December 31. The company used the FIFO inventory costing method, but it failed to apply LCM to the ending inventory. The preliminary income statement follows: Net Sales Cost of Goods Sold $416,000 Beginning Inventory Purchases $44,000 271,000 Goods Available for Sale Ending Inventory (FIFO cost) 315,000 59,360 Cost of Goods Sold 255,640 Gross Profit Operating Expenses 160,360 92,000 Income from Operations Income Tax Expense (30%) 68,360 20,508 Net Income $ 47,852 Assume that you have been asked to restate the financial statements to incorporate developed the following data relating to the ending inventory: LCM. You ha ve Market Value per Acquisition Cost tem Quantity Per Unit Total ni 2,800 1,400 6,800 2,800 $4.30 5.60 2.80 7.30 $12,040 $5.80 7,840 19,040 20,440 2.80 5.80 4.30 59,360

Explanation / Answer

Acquisition cost Market Value Total LCM Basis Item Quantity Per unit Total per unit Market Value (Lower of Cost or Market Value) A 2800 $4.30 $12,040 $5.80 $16,240 $12,040 B 1400 $5.60 $7,840 $2.80 $3,920 $3,920 C 6800 $2.80 $19,040 $5.80 $39,440 $19,040 D 2800 $7.30 $20,440 $4.30 $12,040 $12,040 $59,360 $47,040 Amount of Items Changed FIFO cost LCM Increase basis Basis (Decrease) Ending Inventory $59,360 $47,040 ($12,320) Cost of goods sold $255,640 $        267,960 $12,320 Cost of goods sold( LCM basis)=(315000-47040) Gross Profit $160,360 $        148,040 ($12,320) Gross Profit(LCM basis)= ( (416000-267960) Income from operations $68,360 $          56,040 ($12,320) Income from operations (LCM basis)= (148040-92000) Income tax expenses $20,508 $          16,812 ($3,696) Income tax expenses(LCM basis)=0.3*56040 Net Income $47,852 $          39,228 $      (8,624) Net Income (LCM basis)=(56040-16812)

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