Question

Navajo Company's financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Inventory on December 31, 2017, is understated by $52,000, and inventory on December 31, 2018, is overstated by $22,000. For Year Ended December 31 (a) Cost of goods sold (b) Net income Total current assets (d) Total equity 2017 $ 727,000 270,000 1,249,000 1,389,000 2018 $ 957,000 277,000 1,362,000 1,582,000 2019 $ 792,000 252,000 1,232,000 1,247,000 (c) Required: 1. For each key financial statement figure-(a), (b), (c), and (d) below-complete the table to show the adjustments necessary to correct the reported amounts. 2. What is the error in total net income for the combined three-year period resulting from the inventory errors?

Answer 1

Part 1:

Particulars	2,017	2,018	2,019
COGS	727,000	957,000	792,000
2017	(52,000)	52,000
2018		22,000	(22,000)
Correct COGS	675,000	1,031,000	770,000
Particulars	2,017	2,018	2,019	Total of 3 Years
Net Income	270,000	277,000	252,000	799,000 (#1)
2017	52,000	(52,000)
2018		(22,000)	22,000
Correct Income	322,000	203,000	274,000	799,000 (#1)
Particulars	2,017	2,018	2,019
Current Asset	1,249,000	1,362,000	1,232,000
2017	52,000	(52,000)
2018		(22,000)	22,000
Correct Current Asset	1,301,000	1,288,000	1,254,000
Particulars	2,017	2,018	2,019
Equity	1,389,000	1,582,000	1,247,000
2017	52,000	(52,000)
2018		(22,000)	22,000
Correct Equity Value	1,441,000	1,508,000	1,269,000

Part 2:

Since the total net income is unchanged (From Total point of view of three years), the error in total Net income for three years is $ Nil. (Refer #1)