Question

At December 31, 2010, Dwight Corporation reported current assets of $390,000 and current liabilities of $200,000. The following items may have been recordedincorrectly. Dwight uses the periodic method.

1. Goods purchased costing $22,000 were shipped f.o.b. shipping point by a supplier on December 28. Dwight received and recorded the invoice on December 29, 2010, butthe goods were not included in Dwight's physical count of inventory because they were not received until January 4, 2011.

2. Goods purchased costing $20,000 were shipped f.o.b. destination by a supplier on December 26. Dwight received and recorded the invoice on December 31, but the goodswere not included in Dwight's 2010 physical count of inventory because they were not received until January 2, 2011.

3. Goods held on consignment from Kishi Company were included in Dwight's December 31, 2010, physical count of inventory at $13,000.

4. Freight-in of $3,000 was debited to advertising expense on December 28, 2010.





Instructions

(a) Compute the current ratio based on Dwight's balance sheet.

(b) Recompute the current ratio after corrections are made.

(c) By what amount will income (before taxes) be adjusted up or down as a result of the corrections?

Answer 1

Current Ratio = [Current Assets / Current Liabilities]

Current Ratio = [$390,000 / $200,000]

Current Ratio = 1.95:1

(b)

	Current Assets	Current Liabilities
As reported	$390,000	$200,000
1. Goods recorded but not counted	$22,000
2. Goods recorded but not counted	$20,000
3. Goods on consignment - counted	($13,000)
	$419,000	$200,000

Note: Freight – in to be debited in Purchase account.

Current Ratio = [Current Assets / Current Liabilities]Current Ratio = [$419,000 / $200,000]Current Ratio = 2.095Current RAtio = 2.1:1

(c) Effect on Net Income:

Error No. 1Increase in Ending Inventory(+) 22,000

Error No. 2Increase in Ending Inventory(+) 20,000

Error No. 3Decrease in Ending Inventory(-) (13,000)

Net Effect onIncome(+) 29,000