Question

The December 31, 2021, inventory of Tog Company, based on a physical count, was determined to be $450,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $50,000. The purchase was recorded and paid for in 2022. Another supplier shipment costing $20,000 was cor- rectly recorded as a purchase in 2021. However, the merchandise, shipped FOB shipping point, was not received until 2022 and was incorrectly omitted from the physical count. A third purchase, shipped from a supplier FOB shipping point on December 28, 2021, did not arrive until January 3, 2022. The merchandise, which cost $80,000, 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, 2021, inventory balance and, assuming that the errors were discovered after the 2021 financial statements were issued, analyze the effect of the errors on 2021 cost of goods sold, net income, and retained earnings. (Ignore income taxes.) 2. Prepare a journal entry to correct the errors.

Answer 1

Note that FOB shipping point is freight term where the ownership is transferred to buyer at the time inventory is shipped, hence the inventory should be included in the books of accounts and also has to be counted as part of physical inventory.

1.

Calculation of Inventory Balance

Particulars	Amount $
Inventory as per physical count	450,000.00
Add Inventory FOB Shipping point	20,000.00
Add Inventory FOB shipping point December 8 2021	80,000.00
	550,000.00

Transaction 1 - As the purchases is not booked for $50,000 but included will affect the Cost of goods sold and it will be under stated and Net income and retained earning will be over stated.

Transaction 2 = As the cost of inventory is not included in the closing inventory and included in purchases, the cost of goods sold will be overstated and net income and retained earnings will be understated.

Transaction 3 - There is no impact as it is not included in purchases as well as closing inventory.

2.

Date	Account Title & Explanation	Amount $	Amount $
Transaction 1	Purchases	20,000
	Accounts payable / Cash		20,000
Transaction 2	No adjustment is required
Transaction 3	Purchases	80,000
	Accounts payable / Cash		80,000