Question

The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $450,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $50,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $20,000 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 $80,000, 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. (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 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. (Ignore income taxes). Effect Correct ending inventory Cost of goods sold Net income Retained earnings Understated Overstated Overstated Amount $ 100,000 $ $ 30,000 $ 30,000 $ 30,000

Answer 1

Solution:
Calculation of correct inventor balance as on 31st December 2018
Physical Inventory	$4,50,000
Adjustments:
Shipment of $ 50,000 recorded in 2019	$0
(no impact because goods were received and included in count)
Shipment of $ 20,000 recorded as purchase
(no impact because it was omitted from physical count)	$0
Third purchase costing $ 80,000
(no impact as not included in physical count)	$0
Value of Inventory as on 31st December 2018	$4,50,000
Impact of errors on 2018 cost of goods sold and net income and retained earnings
Cost of goods sold
Shipment of $ 50,000 recorded in 2019- understated	$50,000
Shipment of $ 20,000 recorded as purchase- Overstated	-$20,000
Third purchase costing $ 80,000- No impact	$0
Cost of goods sold - understated	$30,000
As the cost is understated and hence it would mean that net income and retained earnings are overstated by $ 30,000
Journal Entries to correct the errors
Shipment of $ 50,000 recorded in 2019
Cost of goods sold- Debit	$50,000
Retained Earning- Credit	$50,000
Shipment of $ 20,000 recorded as purchase
Retained Earning- Debit	$20,000
Cost of goods Sold-Credit	$20,000
Third purchase costing $ 80,000
No entry required