Question

The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $452,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $52,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $21,000 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 $82,000, was not included in the physical count and the purchase has not yet been recorded. The company uses a periodic inventory system.

Required: 1. 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.)
2. Prepare a journal entry to correct the errors.

1.

	EFFECT	Amount
Correct end Inventory
Cost of goods sold
Net income
Retained Earnings

2.

Event	General Journal	Debit	Credit

Answer 1

Answer:

1. The December 31, 2018 Inventory of TOG Company

	1	2	3	Net Effect
Purchased	under stated 52000		under stated 82000	under stated by 134000
Ending Inventory		under stated 21000	understated 82000	understated by 103000
Cost of goods sold				understated by 31000

Cost of goods sold = Beginning Inventory + Cost of goods sold - Ending Inventory
=134000 - 103000
=31000

Cost of goods sold understated by 31000 hence net income & retained earnings overstated by 31000

Particulars	Effect	Amount
correct ending inventory	understated	103000
Cost of goods sold	understated	31000
Net Income	overstated	31000
Retained earnings	overstated	31000

2. Journal Entry

Date	Particulars	Debit ($)	Credit ($)
	Inventory	103000
	Retained earnings	31000
	Cost of goods sold		134000