At December 31, 2013, Stacy McGill Corporation reported current assets of $383,9

Question

At December 31, 2013, Stacy McGill Corporation reported current assets of $383,900 and current liabilities of $205,600. The following items may have been recorded incorrectly. Goods purchased costing $26,100 were shipped f.o.b. shipping point by a supplier on December 28. McGill received and recorded the invoice on December 29, 2013, but the goods were no included in McGill's physical count of inventory because they were not received until January 4, 2014. Goods purchased costing $15,180 were shipped f.o.b. destination by a supplier on December 26. McGill received and recorded the invoice on December 31, but the goods were not included in McGill's 2013 physical count of inventory because they were not received until January 2, 2014. Goods held on consignment from Claudia Kishi Company were included in McGill's December 31, 2013, physical count of inventory at $13,610. Freight-in of $3,180 was debited to advertising expense on December 28, 2013. Compute the current ratio based on McGill's balance sheet. (Round ratio to 2 decimal places, e.g. 2.31:1.) Recompute the current ratio after corrections are made. (Round ratio to 2 decimal places, e.g. 2.31:1.) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

Explanation / Answer

Current assets= 383900 current liabilities= 205600 1. Purchases amounting to $21600 Invoice received on 29th dec.so journal entry recorded in books as follows: Debit Credit Purchases 21600 To Creditor for purchases 21600 Creditor of purchases is included in current liabilities However , Current assets(closing stock) doesn’t include Purchases Hence increase current asset by 21600 Entry is as follows: Stock in transit 21600 To Purchases 21600 Closing stock 21600 To Stock in transit 21600 2.Purchases costing $15180 Invoice received on 31st dec.so journal entry recorded in books as follows: Debit Credit Purchases 15180 To Creditor for purchases 15180 Creditor of purchases is included in current liabilities However , Current assets(closing stock) doesn’t include Purchases Hence increase current asset by 15180 Entry is as follows: Stock in transit 15180 To Purchases 15180 Closing stock 15180 To Stock in transit 15180 3.Goods held in consignment: Goods held on consignment is property of consignor(claudia kishi company) not consignee(mc Gill), untill it is sold by consignee In other words, goods on consignment are included in the inventory of the consignor (i.e., seller) while they are excluded from the consignee’s (i.e., buyer’s) inventory. Consignee does not own the inventory but agrees to exercise due diligence in holding and selling consigned merchandise. Hence it should not be included in inventory of Mc gill Physical inventory count shows amount as 13610 So current assets(stock) has to be reduced by 13610 4.Freight Transportation-in or freight-in costs are part of the cost of goods purchased. The cost of goods (or any asset) includes all costs necessary to get an asset in place and ready for use. Transportation-in costs are allocated to the products purchased and will "cling" to the products. Those products in inventory (items not yet sold) will include their share of the transportation-in costs (as part of the inventory cost) Hence freight should not be showed as advertising cost, but to be added to cost of inventory So current assets is to be added by $3180 A Current ratio based on Mc Gill Balance sheet: Current assets/current liabilities= 383900/205600=1.867 B Current ratio after corrections: Corrected current assets:383900+26100+15180-13610+3180= 414750 Current liabilities: 205600 Corrected current ratio: 414750/205600= 2.0173 C Adjusted income Advertisement cost wrongly debited So increase income upward to an extent of 3180

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