Doubletree 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, 2010, is understated by $50,000, and inventory on December 31, 2011, is overstated by $20,000.
For Year Ended December 31 | 2010 | 2011 | 2012 |
(a) Cost of goods sold | $ 725,000 | $ 955,000 | $ 790,000 |
(b) Net income | 268,000 | 275,000 | 250,000 |
(c) Total current assets | 1,247,000 | 1,360,000 | 1,230,000 |
(d) Total equity | 1,387,000 | 1,580,000 | 1,245,000 |
Required
1. For each key financial statement figure—(a), (b), (c), and (d) above—prepare a table similar to the following to show the adjustments necessary to correct the reported amounts.
Figure: ______ | 2010 | 201 1 | 2012 |
Reported amount | ______ | ______ | ______ |
Adjustments for: 12/31/2010 error 12/31/2011 error | ______ | ______ | ______ |
______ | ______ | ______ | |
Corrected amount | ______ | ______ | ______ |
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Analysis Component
2. What is the error in total net income for the combined three-year period resulting from the inventory errors? Explain.
3. Explain why the understatement of inventory by $50,000 at the end of 2010 results in an understatement of equity by the same amount in that year.
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