QUESTION #1 On December 31, 2015, Office Systems Ltd.\'s books showed an ending

Question

QUESTION #1 On December 31, 2015, Office Systems Ltd.'s books showed an ending inventory valuation of $400,000. The accounts for 2015 have been adjusted and closed. Subsequently, the bookkeeper prepared a schedule that showed that the inventory should be $484,500, not $420,000. a) Merchandise in store (at 40% above cost) b) Merchandise purchased, in transit (shipped FOB destination, $ 420,000 estimated freight, not included, $550), invoice price Merchandise held for later shipment to Davis Electronics at sales price, 40% above cost (already billed to Davis Electronics) Merchandise out on consignment at sales price (cost, $9,000) Merchandise (office equipment) removed from the warehouse and now used in the company's marketing office (at cost) 10,000 14,000 c) d) e) 18,000 15,000 f Merchandise out on approval, sales price- $7,500, cost $3,000 7,500 Income tax rate 30% Required amount.

Explanation / Answer

Requirement a Computation of correct inventory amount Particular Calculations Amount in $ Reason a Merchandise in store =420000*100/140 300000 b Merchandise purchased & in transit =10000+550 10550 It belongs to us, since ownership has been passed onto us. c Merchandise sold & held for later shipment =14000*100/140 -10000 It does not belongs to us as ownership has already passed onto customer d Merchandise out on consignment =9000 9000 It belongs to us, as it is not sold yet. e Merchandise at company's Marketing office =15000 15000 It belongs to us and lying with maketing department. f Merchandise out on approval =3000 3000 It belongs to us, till it gets approved and sold The correct ending Inventory 327550 Requirement b Statement of Comprehensive Income Over(under) stated Amount of Over(Under) stated Ending Inventory Overstated 10000 Cost of goods sold Understated 10000 Gross Margin Overstated 10000 Pretax earnings Overstated 10000 Income taxes Overstated 3000 Earnings Overstated 7000 Statement of Financial position Inventory Overstated 10000 Income tax payable Overstated 3000 Retained earnings Overstated 7000

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