The December 31, 2018, inventory of Tog Company, based on a physical count, was

Question

The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $460,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $60,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $25,000 was correctly recorded as a purchase in 2018. However, the merchandise, shipped FOB shipping point, was not received until 2019 and was incorrectly omitted from the physical count. A third purchase, shipped from a supplier FOB shipping point on December 28, 2018, did not arrive until January 3, 2019. The merchandise, which cost $90,000, was not included in the physical count and the purchase has not yet been recorded.

The company uses a periodic inventory system.

Required: a. Determine the correct December 31, 2018, inventory balance and, assuming that the errors were discovered after the 2018 financial statements were issued, analyze the effect of the errors on 2018 cost of goods sold, net income, and retained earnings. (Ignore income taxes.) b. Prepare a journal entry to correct the errors.

Explanation / Answer

Answer 1. Dec 31, 2018 - Inventory based on physical Count    460,000.00 Add: Merchandise shipped FOBshipping Point in 2018      25,000.00 Add: Merchandise shipped FOBshipping Point in 2018      90,000.00 Correct Ending Inventory    575,000.00 2018 Beginning Inventory Add: Net Purchases - Understated ($50,000 + $90,000)    140,000.00 Less: Ending Inventory - Understated ($25,000 + $90,000)    115,000.00 Cost of Goods Sold - Understated      25,000.00 Net Income - Overstated      25,000.00 Retained Earnings - Overstated      25,000.00 Answer 2. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Retained Earnings    25,000.00    Cost of Goods Sold    25,000.00 (Record the adjsuting entry for errors)

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