P 20-10 Inventory errors LO20-6 You have been hired as the new controller for th
ID: 2542632 • Letter: P
Question
P 20-10 Inventory errors LO20-6 You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2018. you discover the following errors related to the 2016 and 2017 financial statements: a. Inventory at 12/31/2016 was understated by $6.000. b. Inventory at 12/31/2017 was overstated by $9,000 c. On 12/31/2017, inventory was purchased for $3,000. The company did not record the purchase until the inventory was paid for early in 2018. At that time, the purchase was recorded by a debit to purchases and a credit to cash. The company uses a periodic inventory system Required 1. Assuming that the errors were discovered after the 2017 financial statements were issued, analyze the effect of the errors on 2017 and 2016 cost of goods sold, net income, and retained earnings. (Ignore income taxes.) 2. Prepare a journal entry to correct the errors . What other step(s) would be taken in connection with the error?Explanation / Answer
2016
2017
-3000
-6000
+9000
2016
2017
0
0
-3000
0
-6000
+6000
+9000
2016
2017
0
0
-6000
-3000
0
-9000
-6000
+6000
+9000
-18000
2. General Journal
Debit
Credit
Retained Earnings
12000
Inventory
9000
Purchases
3000
3. The financial statements that were incorrect as a result of both errors (effect of one error in 2016 and effect of three errors in 2017) would be respectively restated to report the correct inventory amounts, cost of goods sold, income, and retained earnings when those statements are reported again for comparative purposes in the 2018 annual report. A prior period adjustment to retained earnings would be reported, and a disclosure note should describe the nature of the error and the impact of its correction on each year’s net income, income before extraordinary items, and earnings per share.
2016
2017
-3000
-6000
+9000
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