Question:
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 $66
Cost 59
Replacement cost 48
Estimated selling expense 21
Normal profit 13
There were 1,000 units of product X on hand at December 31, 2012. Product X was incorrectly valued at $48 per unit for reporting purposes. All 1,000 units were sold in 2013.
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.