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 $405,610 instead of the correct amount of $389,390.

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 20Y9 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, 20Y9, balance sheet?

1. The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
2. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.
3. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Answer 1

Amount of error	16220	=405610-389390
a
Balance Sheet Items	Overstated/Understated	Amount
Merchandise Inventory	Overstated	16220
Current Assets	Overstated	16220
Total Assets	Overstated	16220
Owner's Equity	Overstated	16220
b
Income Statement Items	Overstated/Understated	Amount
Cost of Merchandise Sold	Understated	16220
Gross Profit	Overstated	16220
Net Income	Overstated	16220
c
Income Statement Items	Overstated/Understated	Amount
Cost of Merchandise Sold	Overstated	16220
Gross Profit	Understated	16220
Net Income	Understated	16220
d
The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
Option 1 is correct