Question

You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2021, you discover the following errors related to the 2019 and 2020 financial statements: a. Inventory at 12/31/2019 was understated by $7,100. b. Inventory at 12/31/2020 was overstated by $11,200. c. On 12/31/2020, inventory was purchased for $4,100. The company did not record the purchase until the inventory was paid for early in 2021. At that time, the purchase was recorded by a debit to purchases and a credit to cash. The company uses a periodic inventory system. Required: 1. Assuming that the errors were discovered after the 2020 financial statements were issued, analyze the effect of the errors on 2020 and 2019 cost of goods sold, net income, and retained earnings. (Ignore income taxes.) 2. Prepare a journal entry to correct the errors.

Answer 1

2 B C D E 2019 2020 Particulars Effect Amount Effect Amount 3 Beginning Inventory Understated -7100 4 Add: Purchases Understated -4100 5 Less: Ending Inventory Understated -7100 Overstated 11200 6 Cost of goods sold Overstated 7100 Understated -22400 7 8 Revenues: 9 Less: Cost of goods sold Overstated 7100 Understated -22400 10 Less: Other Expenses 11 Net Income Understated -7100 Overstated 22400 12 Retained Earnings Understated -7100 Overstated 15300 13

A 2 Particulars 3 Beginning Inventory 4 Add: Purchases 5 Less: Ending Inventory 6 Cost of goods sold B DE 2019 2020 Effect Amount Effect Amount Understated -7100 Understated -4100 Understated -7100 Overstated 11200 Overstated 7100 Understated =+E3+E4-+E5 8 Revenues: 9 Less: Cost of goods sold Overstated 1=+C6 Understated (=+E6 10 Less: Other Expenses 11 Net Income Understated =-C9 Overstated =-E9 12 Retained Earnings Understated =+C11 Overstated =+E11+C12 13 14

А B B C D 2 Date Debit Credit 153001 Account Title Retained Earnings Inventory Purchases 112001 4100 1