have been hired as the new controller for the Ralston Company, Shortly after joi

Question

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 12/31/16 was understated by $6,600 b. Inventory at 12/31/17 was overstated by $9,600 2s) C. On 12/31/17, inventory was purchased for $3,600. 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 and 2016 cost of goods sold, net income, and retained earnings. (Ignore income taxes.) s 1. Assuming that the errors were discovered after the 2017 financial statements were issued, analyze the effect of the errors on 2017 2. Prepare a journal entry to correct the errors

Explanation / Answer

1)

Journal Entry :-

2016 Effect 2017 Effect Opening Inventory Opening Inventory Understated $6600 add : Purchases add : Purchases Understated $3600 Less : Ending Inventory Understated $6600 Less : Ending Inventory Overstated $9600 Cost of Goods Sold Overstated $6600 Cost of Goods Sold Understated $19800 Revenues ;- Revenues ;- Less : Cost of Goods Sold Overstated $6600 Less : Cost of Goods Sold Underststed $19800 Net Income Understated $6600 Net Income Overstated $19800 Retained Earning Understated $6600 Retained Earning Overstated $13200

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