Question

Effect of Errors in Physical Inventory Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $324,140 instead of the correct amount of $311,170. Enter all amounts as positive numbers. a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop. Balance Sheet Items Overstated/Understated Amount Merchandise Inventory Current Assets Total Assets Owner's Equity b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8. Income Statement Items Overstated/Understated Amount Cost of Merchandise Sold Gross Profit Net Income c. If uncorrected, what would be the effect of the error on the 2049 income statement? Income Statement Items Understated/Overstated Amount Cost of Merchandise Sold Gross Profit Net Income d. If uncorrected, what would be the effect of the error on the December 31, 2019, balance sheet? 1. The December 31, 2019, balance sheet would be correct, since the 2048 inventory error reverses itself in 2019. 2. The December 31, 2019, balance sheet would be incorrect, since the 2048 inventory error understates the inventory in 2019. 3. The December 31, 2019, balance sheet would be incorrect, since the 2048 inventory error overstates the inventory in 2019.

Answer 1

Correct inventory = $311,170

Incorrect inventory = $324,140

Overstated inventory = Incorrect inventory - Correct inventory

= 324,140 - 311,170

= $12,970

a. Effects of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

Balance Sheet Items	Overstated / Understated	Amount
Inventory	Overstated	$12,970
Current Assets	Overstated	$12,970
Total Assets	Overstated	$12,970
Stockholders’ Equity	Overstated	$12,970

b. Effects of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

Income Statement Items	Overstated / Understated	Amount
Cost of Goods Sold	Understated	$12,970
Gross Profit	Overstated	$12,970
Net Income	Overstated	$12,970

c. If uncorrected, Effects of the error on the 20Y9 income statement

Income Statement Items	Understated / Overstated	Amount
Cost of Goods Sold	Overstated	$12,970
Gross Profit	Understated	$12,970
Net Income	Understated	$12,970

d. If uncorrected, the effects of the error on the December 31, 20Y9, balance sheet would be as under:

The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.

Hence, correct option is 1.

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