Smart Company prepared its annual financial statements dated
December 31, 2020. The company applies the FIFO inventory costing
method; however, the company neglected to apply the LC&NRV
valuation to the ending inventory. The preliminary 2020 statement
of earnings follows:
| Sales revenue | $ | 297,000 | ||||
| Cost of sales | ||||||
| Beginning inventory | $ | 32,700 | ||||
| Purchases | 201,000 | |||||
| Cost of goods available for sale | 233,700 | |||||
| Ending inventory (FIFO cost) | 75,536 | |||||
| Cost of sales | 158,164 | |||||
| Gross profit | 138,836 | |||||
| Operating expenses | 63,700 | |||||
| Pretax earnings | 75,136 | |||||
| Income tax expense (40%) | 30,054 | |||||
| Net earnings | $ | 45,082 | ||||
Assume that you have been asked to restate the 2020 financial
statements to incorporate the LC&NRV inventory valuation rule.
You have developed the following data relating to the ending
inventory at December 31, 2020:
| Acquisition Cost | ||||||||||||
| Item | Quantity | Unit | Total | Net Realizable Value | ||||||||
| A | 3,220 | $ | 4.70 | $ | 15,134 | $ | 5.70 | |||||
| B | 1,670 | 6.70 | 11,189 | 5.20 | ||||||||
| C | 7,270 | 3.20 | 23,264 | 5.20 | ||||||||
| D | 3,370 | 7.70 | 25,949 | 5.70 | ||||||||
| $ | 75,536 | |||||||||||
1. Restate the statement of earnings to reflect the valuation of the ending inventory on December 31, 2020, at the LC&NRV. Apply the LC&NRV rule on an item-by-item basis.
| Smart Company | ||
| Income Statement | ||
| Income Statement (LC&NRV Basis ) | ||
| For the Year Ended December 31 | ||
| Sales Revenue | $297,000.00 | |
| Cost Of Goods Sold | ||
| Beginning Inventory | $32,700.00 | |
| Purchases | $201,000.00 | |
| Goods Available For Sale | $233,700.00 | |
| Ending Inventory (As per LCNRV) | $66,291.00 | |
| Cost Of Goods Sold | $167,409.00 | |
| Gross Profit | $129,591.00 | |
| Operating Expenses | $63,700.00 | |
| Income From Operations | $65,891.00 | |
| Income Tax Expense (40%) | $26,356.40 | |
| Net Income | $39,534.60 |
| Item | Quantity (a) |
Acquistion Cost /Unit (b) | Acqusution cost (c=axb) |
Market Value/Unit (d) | Market Value (a*d) |
LCNRV |
| A | 3220 | $4.70 | $15,134.00 | $5.70 | $18,354.00 | $15,134.00 |
| B | 1670 | $6.70 | $11,189.00 | $5.20 | $8,684.00 | $8,684.00 |
| C | 7270 | $3.20 | $23,264.00 | $5.20 | $37,804.00 | $23,264.00 |
| D | 3370 | $7.70 | $25,949.00 | $5.70 | $19,209.00 | $19,209.00 |
| $75,536.00 | $84,051.00 | $66,291.00 |
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