(Lower of Cost or Market—Error Effect) LaGreca Company uses the lower of cost or market method, on an individual item basis, in pricing its inventory items. The inventory at December 31, 2012, included product X. Relevant per unit data for product X appear below.
|
Estimated selling price |
$50 |
|
Cost |
40 |
|
Replacement cost |
38 |
|
Estimated selling expense |
14 |
|
Normal profit |
9 |
There were 1,000 units of product X on hand at December 31, 2012. Product X was incorrectly valued at $38 per unit for reporting purposes. All 1,000 units were sold in 2013.
Instructions
Compute the effect of this error on net income for 2012 and the effect on net income for 2013, and indicate the direction of the misstatement for each year.