Question

1.

You have been hired as the new controller for the Ralston Company. Shortly after joining the company In 2018, you discover the following errors related to the 2016 and 2017 financial statements: a. Inventory at 12/31/2016 was understated by $7,800. b. Inventory at 12/31/2017 was overstated by $12,600. c. On 12/31/2017, Inventory was purchased for $4,800. The company did not record the purchase until the Inventory was paid for early In 2018. 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 2017 financial statements were issued, analyze the effect of the errors on 2017 and 2016 cost of goods sold, net Income, and retained earnings. (Ignore Income taxes.) 2. Prepare a Journal entry to correct the errors. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Assuming that the errors were discovered after the 2017 financial statements were issued, analyze the effect of the errors on 2017 and 2016 cost of goods sold, net income, and retained earnings. (Ignore income taxes.) (Indicate the effect by selecting "O" for Overstated, "U" for Understated and "NE" for No effect. Input all values as positive amounts. Be certain to enter zero wherever needed.) 2017 2016 Beginning inventory Plus: Net purchases Less: Ending inventory Cost of goods sold Beginning inventory Plus: Net purchases Less: Ending inventory Cost of goods sold Revenues Less: Cost of goods sold Less: Other expenses Net income Revenues Less: Cost of goods sold Less: Other expenses Net income Retained earnings Retained earnings

2.

Answer 1

1 (1)	2016	Effect	2017	Effect
	Beginning inventory		Beginning inventory	Understated $7800
	Add: Purchase		Add: Purchase	Understated $4800
	Less: Ending inventory	Understated $7800	Less: Ending inventory	Overstated $12600
	Cost of good sold	Overstated $7800	Cost of good sold	Understated $25200
	Revenue:		Revenue:
	Less: Cost of good sold	Overstated $7800	Less: Cost of good sold	Understated $25200
	Less: other expense		Less: other expense
	Net income	Understated $7800	Net income	Overstated $25200
	Retained Earnings	Understated $7800	Retained Earnings	Overstated $17400
2	Event	General Journal	Debit ($)	Credit ($)
		Retained Earnings	$17400
		Inventory		$12600
		Purchase		$4800
		(Being record error
		correction entry)
2 (1)
	Event	Type of Change
a	An error	Not applicable
b	An accounting change	Change in estimate
c	An error	Not applicable
d	An accounting change	Change in accounting principle
e	An error	Not applicable
f	An accounting change	Change in accounting principle
g	An accounting change	Change is estimate
2
Transaction	General Journal	Debit ($)	Credit ($)
a	Prepaid insurance	$20400		(34000-(6800*2))
	Income tax payable		$8160	(20400*40%)
	Retained earnings		$12240
	Insurance expense	$6800		(34000/5)
	Prepaid insurance		$6800
b	No Journal entry required
	Depreciation expense	$14800
	Accumulated depreciation (W.N)		$14800
c	Retained earnings	$14400		(24000-9600 = 14400)
	Refund - income tax	$9600		(24000*40% = 9600)
	Inventory		$24000
	No Journal entry required
d	Inventory	$950000
	Retained earnings		$570000	(950000-380000=570000)
	Income tax payable		$380000	(950000*40% = 380000)
	No Journal entry required
e	Retained earnings	$9180		(15300-6120 = 9180)
	Refund - income tax	$6120		(15300*40% = 6120)
	Compensation expense		$15300
	No Journal entry required
f	No Journal entry required
	Depreciation expense	$56000		($448000/8)
	Accumulated depreciation		$56000
g	No Journal entry required
	Warranty expense	$28500		($3800000*.75%)
	Warranty Liability		$28500
	Note:
	Calculation of depreciation:
	Cost	592000
	Salvage value	100000
	Net cost	492000
	Useful life	40
	Depreciation	12300
	Accumulated depreciation	123000	(12300*10)
	Depreciation 2018	592000-123000-25000/30
		14800