On March 5, 2017, you were hired by Miami Hangers Inc., a closely held company,

Question

On March 5, 2017, you were hired by Miami Hangers Inc., a closely held company, as a staff member of its newly created internal auditing department. While reviewing the company’s records for 2015 and 2016, you discover that no adjustments have yet been made for the items listed below.

Merchandise inventory costing $34,600 was in the warehouse at December 31, 2015, but was incorrectly omitted from the physical count at that date. The company uses the periodic inventory method.

Instructions 1. What is the effect of each item on the 2015 and 2016, December 31, income statement and retained earnings balance?

2. Assuming the 2016 books are not closed, what are the journal entries to correct these errors?

Explanation / Answer

Merchandise Inventory on 31.12.15 was not shown in the books $34,600 Which resulted in an understatement of Income and Retained earnings in the books for 2015 by $34,600 Opening inventory on 1.1.16 was also eventually understated by $34,600 Which resulted in an oversatement of Income and Retained earnings in the books for 2016 by $34,600 To adjust the above the below journal entry can be passed Debit Credit Opening Merchandise Inventory for 2016 $34,600                 To, Retained Earnings $34,600 (Being the overstatement of retained earnings in the year 2015 is adjusted to retained earnings to correct the error)

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