Question

77) Given the following data: Ending inventory at cost $24,000 Ending inventory at current net realizable value 23,600 Cost of goods sold (before consideration of the lower-of-cost-and-net-realizable-value rule) 37,000 Which of the following depicts the proper account balance after the application of the lower-of-cost-and-net realizable value rule?

A) Cost of goods sold will be $37,400. B) Cost of goods sold will be $36,400. C) Cost of goods sold will be $37,000. D) Ending inventory will be $24,000.

78) Inventory at the end of the current year is overstated by $20,000. What effect will this error have on the following year's net income?

A) Net income will be overstated $20,000. B) Net income will be understated $20,000. C) Net income will be correctly stated. D) Net income will be understated $40,000.

79) Two separate errors affected Satellite City in 2010. The beginning inventory was understated by $28,000 and the ending inventory was understated by $43,000. Net income in 2010 will be:

A) understated by $15,000

B) understated by $71,000

C) understated by $43,000

D) overstated by $15,000

80) Two separate errors affected Satellite City in 2010. The beginning inventory was understated by $28,000 and the ending inventory was understated by $43,000. Net income in 2011 will be:

A) overstated by $15,000

B) overstated by $43,000

C) understated by $43,000

D) understated by $71,000

81) Two separate errors affected Rollings Company in 2010. The beginning inventory was overstated by $12,000 and the ending inventory was overstated by $18,000. Net income in 2010 will be:

A) overstated by $30,000

B) overstated by $12,000

C) overstated by $6,000

D) understated by $6,000

82) Two separate errors affected Rollings Company in 2010. The beginning inventory was overstated by $12,000 and the ending inventory was overstated by $18,000. Net income in 2011 will be:

A) overstated by $30,000

B) understated by $18,000

C) overstated by $18,000

D) overstated by $6,000

Answer 1

Answer:

77) The correct answer is  B) Cost of goods sold will be $36,400. This is because the closing stock will be recorded at $ 23, 600 (lower of 24000 and 23,600) affecting the valuation of COGS considering the formula of COGS i.e. Opening Stock + Purchases - Closing Stock.

Therefore, COGS = 37000( before consideration of the lower-of-cost-and-net-realizable-value rule) - 400 (loss of $400 on consideration of the lower-of-cost-and-net-realizable-value rule)

COGS = $36,400

78) The correct answer is A) Net income will be overstated $20,000. This is because closing stock is shown on the credit side of the income statement i.e. plus side of the income statement, hence will increase the net income.

79) The correct answer is A) understated by $15,000. This is because closing stock is shown on the credit side of the income statement i.e. plus side of the income statement, hence will decrease the net income if it is understated and similarly Opening stock is shown on the debit side of the income statement i.e. minus side of the income statement, hence will increase the net income if it is understated. Therefore, Net Income will decrease by the difference amount of understated Opening and closing stock i.e. $15,000(-43,000+28,000).

80) The correct answer is B) overstated by $43,000. This is because Closing Stock of 2010 will become the Opening Stock of 2011 and Opening stock is shown on the debit side of the income statement i.e. minus side of the income statement, hence will increase the net income if it is understated.

81) The correct answer is C) overstated by $6,000. This is because closing stock is shown on the credit side of the income statement i.e. plus side of the income statement, hence will increase the net income if it is overstated and similarly Opening stock is shown on the debit side of the income statement i.e. minus side of the income statement, hence will decrease the net income if it is overstated. Therefore, Net Income will decrease by the difference amount of understated Opening and closing stock i.e. $6,000(18,000-12,000).

82) The correct answer is B) understated by $18,000. This is because Closing Stock of 2010 will become the Opening Stock of 2011 and Opening stock is shown on the debit side of the income statement i.e. minus side of the income statement, hence will decrease the net income if it is overstated.