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: Year 1 ending inventory is understated by $61,000, and Year 2 ending inventory is overstated by $31,000. $ $ $ For Year Ended December 31 (a) Cost of goods sold (b) Net income (c) Total current assets (d) Total equity Year 1 736,000 279,000 1,258,000 1,398,000 Year 2 966,000 286,000 1,371,000 1,591,000 Year 3 801,000 261,000 1,241,000 1,256,000 Required: 1. For each key financial statement figure-(a), (b), (c), and (c) below-prepare a table to show the adjustments necessary to correct the reported amounts. 2. What is the total error in combined net income for the three-year period resulting from the inventory errors? Complete this question by entering your answers in the tabs below.

PLEASE ANSWER ACCORDING TO THE RESPECTIVE TABLES; {THE BLUE HIGHLIGHT AREAS AROUND EACH UNIT}

Answer 1

Solution:

Required 2: Error in total net income of three years will be Nil i.e. no effect on combined net income of three years.

Required 1:

			Year 1	Year 2	Year 3
1	Cost of goods sold		$	$	$
	Reported amount		736,000	966,000	801,000
	Adjustments for:	12/31/Year 1	-61,000	61,000
		12/31 Year 2		31,000	-31,000
	Corrected Amount		675,000	1,058,000	770,000
2	Net Income
	Reported amount		279,000	286,000	261,000
	Adjustments for:	12/31/Year 1	61,000	-61,000
		12/31 Year 2		-31,000	31,000
	Corrected Amount		340,000	194,000	292,000
3	Total current assets
	Reported amount		1,258,000	1,371,000	1,241,000
	Adjustments for:	12/31/Year 1	61,000
		12/31 Year 2		-31,000
	Corrected Amount		1,319,000	1,340,000	1,241,000
4	Total Equity
	Reported amount		1,398,000	1,591,000	1,256,000
	Adjustments for:	12/31/Year 1	61,000	-61,000
		12/31 Year 2		-31,000	31,000
	Corrected Amount		1,459,000	1,499,000	1,287,000