Question

The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $460,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $60,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $25,000 was correctly recorded as a purchase in 2018. However, the merchandise, shipped FOB shipping point, was not received until 2019 and was incorrectly omitted from the physical count. A third purchase, shipped from a supplier FOB shipping point on December 28, 2018, did not arrive until January 3, 2019. The merchandise, which cost $90,000, was not included in the physical count and the purchase has not yet been recorded The company uses a periodic inventory system. Required: 1. Determine the correct December 31, 2018, inventory balance and, assuming that the errors were discovered after the 2018 financial statements were issued, analyze the effect of the errors on 2018 cost of goods sold, net income, and retained earnings. (lgnore income taxes. 2. Prepare a journal entry to correct the errors.

Answer 1

ANSWER:

(1).
Dec 31, 2018 - Inventory based on physical Count	460,000.00
Add: Merchandise shipped FOB shipping Point in 2018	25,000.00
Add: Merchandise shipped FOB shipping Point in 2018	90,000.00
Correct Ending Inventory	575,000.00
2018
Beginning Inventory
Add: Net Purchases - Understated ($50,000 + $90,000)	140,000.00
Less: Ending Inventory - Understated ($25,000 + $90,000)	115,000.00
Cost of Goods Sold - Understated	25,000.00
Net Income - Overstated	25,000.00
Retained Earnings - Overstated	25,000.00

(2).
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
1	Retained Earnings	25,000.00
	Cost of Goods Sold		25,000.00
	(Record the adjusting entry for errors)

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Answer 2

In the above answer the intial calculations are correct for Req. 1. The journal entry is not entirley accurate (it's lacking additional entries). The appropriate journal entry:

Debit Accounts:

-Inventory (correct ending inventory amount - initial physical count)

-Retained earnings (retained earnings amount from Req. 1)

Credit Accounts:

-Purchases ($60,000)

-Accounts Payable ($90,000 not included in the physical count and not yet recorded)