Question

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

LaGreca Company uses the LCNRV method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2017, included product X. Relevant per-unit data for product X are as follows.

Estimated selling price

$50

Cost

40

Estimated selling costs

14

Normal profit

9

There were 1,000 units of product X on hand at December 31, 2017. Product X was incorrectly valued at $38 per unit for reporting purposes. All 1,000 units were sold in 2018.

Instructions

Compute the effect of this error on net income for 2017 and the effect on net income for 2018, and indicate the direction of the misstatement for each year.

Business   Accounting   
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Homework Answers

Answer #1

Effect of this error on net income for 2017

Selling price

$50

Less: Selling costs

$14

Net realisable value

$36

Cost

$40

Cost or net realisable value

$36

inventory value of $1,000 units - 1,000*36 = $36,000 but wrongly valued at $38,000

Ans

Effect on financial statements

1. Profit for the year 2017 overstated by $2,000

2. Ending Inventory value overstated by $2,000

Effect of this error on net income for 2018

Ans

Effect on financial statements

1. Profit for the year understated by $2,000

2. Beginning inventory balance is overstated by $2,000
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