Question

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 Dr was understated by 6000 

b. Inventory at 12/31/17 was overstated by $9.900 

c. On 3117 inventory was purchased for $3.900. 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 (gnore income taxes)

 2. Prepare a journal entry to correct the errors. Complete this question by entering your answers in the tabs below.

Answer 1

Solution

Ralston Company

1. Analysis of the effects of errors on the 2017 and 2016 cost of goods sold, net income and retained earnings:

	2016			2017
Ending Inventory	Understated		$6,900	Overstated		$9,900
Cost of goods sold	Overstated		$6,900	Understated		$20,700
Net Income	Understated		$6,900	Overstated		$20,700
Retained Earnings	Understated		$6,900	Overstated		$13,800
Calculations: 2016		Effect			2017			Effect
Beginning inventory					Beginning inventory			Understated $6,900
Add: purchases					Add: purchases			Understated $3,900
Less: Ending inventory		Understated $6,900			Less: ending inventory			Overstated $9,900
Cost of goods sold		Overstated $6,900			Cost of goods sold			Understated $20,700
Revenues					Revenues
Less: cost of goods sold		Overstated $6,900			Less: Cost of goods sold			Understated $20,700
Less: other expenses					Less: other expenses
Net Income		Understated $6,900			Net Income			Overstated $20,700
Retained Earnings		Understated $6,900			Retained Earnings			Overstated 20,700 - 6,900 = $13,800

2. Journal entry to correct the errors:

Account Titles	Debit	Credit
Retained Earnings	$13,800
Inventory		$9,900
Purchases		$3,900
(error correction entry)