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Windsor Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The...

Windsor Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2020, included product X. Relevant per-unit data for product X are as follows.

Estimated selling price $49
Cost 38
Estimated selling costs 15
Normal profit 9


There were 1,050 units of product X on hand at December 31, 2020. Product X was incorrectly valued at $38 per unit for reporting purposes. All 1,050 units were sold in 2021.

Compute the effect of this error on net income for 2020 and the effect on net income for 2021, and indicate the direction of the misstatement for each year.

Net income for 2020 $

OverstatedUnderstatedNeither overstated nor understated
Net income for 2021 $

OverstatedUnderstatedNeither overstated nor understated
Business   Accounting   
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Answer #1

Effect of this error on net income for 2020
Selling price $       49.00
Less: Selling costs $       15.00
Net realisable value $       34.00
Cost $       38.00
Cost or net realisable value $       34.00
Correct Value for 2020 (1050*$34) $35,700.00
Wrongly Valued at $38 (1050 *$38) $39,900.00
Net Income overstated by $ 4,200.00
Since ending inventory is valued at higher cost it has overstated the net income for the year 2020
Effect of this error on net income for 2021
Net Income for the year understated by $ 4,200.00
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