Question

Navajo Company's financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Inventory on December 31, 2017, is understated by $51,000, and inventory on December 31, 2018, is overstated by $21,000. For Year Ended December 31 2017 2018 2019 Cost of (a) goods $ 726,000 $ 956,000 $ 791,000 sold Net 269,000 276,000 251,000 Total (c) current 1,248,000 1,361,000 1,231,000 assets (a) equity 1,388,000 1,581,000 1,246,000 (b) income (d) Total Required: 1. For each key financial statement figure-(a), (b), (c), and (d) below-complete the table to show the adjustments necessary to correct the reported amounts. 2. What is the error in total net income for the combined three-year period resulting from the inventory errors? Complete this question by entering your answers in the tabs below. Required Required For each key financial statement figure-(a), (b), (c), and (d) below-complete the table to show the adjustments necessary to correct the reported amounts. (Amounts to be deducted must be entered with a minus sign.) 2017 2018 2019 Cost of goods sold: Reported amount Adjustments for: 12/31/2017 error 12/31/2018 error $ 0 $ 0$ o Corrected amount Net income: Reported amount Adjustments for: 12/31/2017 error 12/31/2018 error $ 0 $ 0 $ Corrected amount Total current assets: Reported amount Adjustments for: 12/31/2017 error 12/31/2018 error

Answer 1

Solution

Navajo Company

1. Adjustments to correct the reported amounts:

			2017	2018	2019
a	Cost of goods sold
	Reported Amounts		$726,000	$956,000	$791,000
	Adjustments for	12/31/2017 error	($51,000)	$51,000
		12/31/2018 error		$21,000	($21,000)
	Corrected Amount		$675,000	$1,028,000	$770,000
b	Net Income
	Reported Amounts		$269,000	$276,000	$251,000
	Adjustments for	12/31/2017 error	$51,000	($51,000)
		12/31/2018 error		($21,000)	$21,000
	Corrected Amount		$320,000	$204,000	$272,000
c	Total Current Assets
	Reported Amounts		$1,248,000	$1,361,000	$1,231,000
	Adjustments for	12/31/2017 error	$51,000	($51,000)
		12/31/2018 error		$21,000	($21,000)
	Corrected Amount		$1,299,000	$1,630,000	$1,210,000
d	Total Equity
	Reported Amounts		$1,388,000	$1,581,000	$1,246,000
	Adjustments for	12/31/2017 error	$51,000	($51,000)
		12/31/2018 error		$21,000	($21,000)
	Corrected Amount		$1,439,000	$1,611,000	$1,225,000

2. Determination of the error in total net income for the combined three-year period resulting from the inventory errors:

The net effect to total net income would be zero for the combined three-year period as the corrections offset the errors year over year. The combined net income over the three-year period would be $796,000.