8. Correction of errors. Vancè Company reported net incomes for a three-year per

Question

8. Correction of errors. Vancè Company reported net incomes for a three-year period 'as follows: 2016, $191,000; 2017, $199,000; 2018, $180,000. In reviewing the accounts in 2019 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities: 2017 $42,000 $51,000 $31,000 12,000 2016 2018 Overstatement of ending inventory Understatement of accrued advertising expense 6,600 7,200 Instructions (a) Determine corrected net incomes for 2016, 2017, and 2018. (b) Give the entry to bring the books of the company up to date in 2019, assuming that the books have been closed for 2018.

Explanation / Answer

Solution - 1:

Correct Net Income will be as follows:

Working Note:

1. Overstatement of ending inventory have increased the income in past. To reach at the correct profit, overstated value needs to be reversed.

2. Overstatement of closing inventory in 1 year will lead to overstated opening stock in next year. It will reduce the income of that year by overstated value. To reach at the correct income, It needs to be added back.

3. Understatement of Accrued Expenses will increase the Profit for a year. It needs to be added back to reach at correct profit.

4. Accrued Expenses understated last year could have claimed this year. So it needs to be added back to reach the correct income.

Solution-2:

The Net impact on total P&L would be 191,000 + 199,000+ 180,000 - 142,400 - 184,600 - 204,800 = $38,200

Since Inventory is still overvalued hence needs to be brought down. Accrued Expenses are understated hence to be brought at correct number.

Accounting Entry will be as follows:

Year 2016 2017 2018 Net income reported 191,000 199,000 180,000 Less: Overstatement of ending inventory -42000 -51000 -31000 Add: Overstatement of Opening inventory 42000 51000 Less: Understatement of Accrued Expenses -6600 -12000 -7200 Add: Accrued Expenses understated last year claimed this year 6600 12000 Correct Net Income 142,400 184,600 204,800 48,600 14,400 -24,800

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