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* Perpetual Invent × © Perpetual Invent × © Perpetual Invent × © Chegg Study IG × @ Homepage. ACC × + ¢v2.cengagenow.com/ilrntakeAssignment/takeAssignmentMain.do?!nvoker-... asearch Ch 7-3 Exercises & Problems eBook Calculator Print Item Effect of Errors in Physical Inventory Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessorles. During the taklng of Its physlcal Inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $188,260 instead of the correct amount of $180,730. Enter all amounts as positive numbers. a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop. Balance Sheet Items Merchandise Inventory Current Assets Total Assets Owner's Equity b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8 1. EX.07-15.ALGO 2. EX.07-03.ALGO 3. EX.07-04.ALGO 4. EX.07-08 Overstated Understated Amount 5. EX.07-13.ALGO 6. EX.07-18.ALGO Income Statement Items Overstated Understated Amount Cost of Merchandise Sold Gross Profit Net Income c. If uncorrected, what would be the effect of the error on the 20YS income statement? Income Statement Items Understated/ Overstated Amount Cost of Merchandise Sold Check My Work 2 more Check My Work uses remaining. Previous Progress: 6/6 items Assignment Score: 0.0% Save and Exit Submit Assignment for Grading Type here to search 1024 PM 11/15/2017 10Explanation / Answer
Solution:
a) Effect of the error on the Dec.31, 20Y8, Balance Sheet
Balance Sheet Items
Overstated / Understated
Amount
Merchandise Inventory
Overstated
$7,530
(188,260 – 180,730)
Current Assets
Overstated
$7,530
Total Assets
Overstated
$7,530
Owner's Equity
Overstated
$7,530
Note --- The Inventory is overstated by $7,530 (188,260 – 180,730)
b) Effect of the error on the Income Statement for the year edned Dec.31, 20Y8
Income Statement Items
Overstated / Understated
Amount
Cost of Merchandise Sold
Understated
$7,530
Gross Profit
Overstated
$7,530
Net Income
Overstated
$7,530
Note ----
Cost of Merchandise Sold = Cost of Goods Manufactured + Beginning Inventory – Ending Inventory
Since Ending Inventory is overstated by $7,530, we will get Cost of Merchandise Sold understated.
Gross Profit = Sales – Cost of Merchandise Sold
Since cost of merchandise sold is shown less that what would be, the Gross Profit will be higher by that amount $7,530.
The same effect Net Income
c) Effect of error on the 20Y9 Income Statement
Income Statement Items
Overstated / Understated
Amount
Cost of Merchandise Sold
Overstated
$7,530
Gross Profit
Understated
$7,530
Net Income
Understated
$7,530
Note --- Ending Inventory of 20Y8 will become beginning inventory of 20Y9.
It means Cost of Merchandise will increase by $7,530 overstated.
d) Effect of error on the 20Y9 Balance Sheet
Correct option is 1) The Dec 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverse itself in 20Y9.
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a) Effect of the error on the Dec.31, 20Y8, Balance Sheet
Balance Sheet Items
Overstated / Understated
Amount
Merchandise Inventory
Overstated
$7,530
(188,260 – 180,730)
Current Assets
Overstated
$7,530
Total Assets
Overstated
$7,530
Owner's Equity
Overstated
$7,530
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