Question

canoes, y , whitewaters, and other heating wees. Duhet $507,110 instead of the correct amount of $522,320 pre ventory on December 11, 2012, Misur incomedy counted to inventory Se the effect of the error on the December 31, 2012, balance sheet of Mist Balance Sheet thems Under /Oversted er Spy Current Assets To S Owner's out t oer on the income state Income ntem Oversteunderstand Cost of Merchandise Sold Gross Profit what w e re effect of the error on the 2013 income Cost of Merchand Overstated/Undert

Answer 1

Difference in recording the inventory amount= Corrected amount-Incorrectly counted

= $522320-507110= $15210

a)

Balance Sheet Items	Overstated/Understated	Amount
Merchandise inventory	Understated	$15210
Current assets	Understated	$15210
Total assets	Understated	$15210
Owner's equity	Understated	$15210

As the company recording less ending inventory as compared to the actual the merchandise inventory, current asset, total assets will be understated. And owner's equity will also be understated as the net income of this year will understated by the error in recording the inventory which will result in understated of owner's equity

b)

Income Statement Items	Understated/Overstated	Amount
Cost of merchandise sold	Overstated	$15210
Gross profit	Understated	$15210
Net income	Understated	$15210

As the ending inventory is understated by $15210, the cost of merchandise sold will become overstated while the gross profit and net income will result understated.

c)

Income Statement Items	Understated/Overstated	Amount
Cost of merchandise sold	Understated	$15210
Gross profit	Overstated	$15210
Net income	Overstated	$15210

As the ending inventory of 20Y2 will be the beginning inventory of the 20Y3, the effect of the errors will be reversed means the cost of merchandise sold will understated while the gross profit and net income will overstated.

d) As the company record inventory of $507110 while the correct inventory is $522320, that means the company has recorded less ending inventory while the actual ending inventory is more. As the ending inventory of this year will be the beginning inventory of the next year the effects of the error will automatically be reversed.

So, the answer is option A) The December 31, 20Y3, balance sheet would be correct, since the 20Y2 inventory error reverses itself in 20Y3.