3.Inventory Errors: In 2016, the contro year-end inventory count failed to inclu

Question

3.Inventory Errors: In 2016, the contro year-end inventory count failed to include $20,000 of company merchandise held on consignment by Penguin Corporation. Phoenix uses a periodic inventory system. omission of the merchandise on consignment, the year-end inventory count was amounts of the errors are deemed to be material. (8 points) ller of Phoenix Corporation discovered that the 2015 han the Other t correct. The Required: 1. What accounts get impacted? termine the effect of the errors on those accounts and retained earnings at January 1, 2016. Explain (Ignore income taxes.) (4 points) 2. Prepare a journal entry to correct the errors. (4 points)

Explanation / Answer

1.

Merchandise Inventory account and the retained earnings accounts will be impacted due to the error.

Merchandise Inventory :

Since the ending inventory in the year 2015 was understated, the beginning inventory for 2016 will also be understated, which will result in lower cost of goods sold for the year 2016, if no correction is made, which will impact the net income for the year 2016.

Retained Earnings:

As the ending inventory was understated in 2015, this would have resulted a lower net income for 2015 which will result in a lower retained earnings as at the end of 2015. The effect will be reverse in the year 2016, and a higher net income will be reported.

2.

Dec 30, 2016 Merchandise Inventory 20000 Retained Earnings 20000 (Correcion of the value of beginning inventory )

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