Calculator eBook Effect of Errors in Physical Inventory op s

Calculator eBook Effect of Errors in Physical Inventory op sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its phrysical inventory on December 31, Motorcyde Shop incorrectly counted its inventory as $205,740 instead of the correct amount of $197,510 Edipse Motorcyde Sho Enter all amounts as positive numbers. a. State the effect of the error on the December 31, 2014, balance sheet of Eclipse Motorcyde Shop Balance Sheet Items Merchandise Inventory Current Assets Total Assets Owner\'s Equity b. State the effect of the error on the income statement of Edipse Motorcydle Shop for the year ended December 31, 2014, Income Statement Items Overstated/ Understated Amount Overstated/ Understated Amount Cost of Merchandise Sold Gross Profit Net Income c. If uncorrected, what would be the effect of the error on the 2015 income statement? Understated/Overstated Amount Income Statement Items Cost of Merchandise Sold Genee

Solution

a

Effect of Error on December 31 2014 balance sheet

Overstated/Understated

Amount

Reason

Merchandise Inventory

Overstated

$ 8,230.00

Actual value is low.

Current Assets

Overstated

$ 8,230.00

Inventory value is high and inventory is a part of Current assets.

Owner\'s Equity

Overstated

$ 8,230.00

Retained earnings will be overstated and retained earnings is a part of Owner’s Equity.

b

Effect of Error on December 31 2014 Income Statement

Overstated/Understated

Amount

Reason

Cost of Merchandise Sold

Understated

$ 8,230.00

Closing inventory is higher than actual that is why cost of merchandise sold would be understated.

Gross Profit

Overstated

$ 8,230.00

Due to Understated cost of Merchandise sold Gross profit would be overstated.

Net Income

Overstated

$ 8,230.00

Due to Overstated Gross profit Net Income would also be Overstated.

c

Effect of Error on December 31 2015 Income Statement

Overstated/Understated

Amount

Reason

Cost of Merchandise Sold

Overstated

$ 8,230.00

Opening Merchandising inventory would be overstated hence cost of merchandise is overstated.

Gross Profit

Understated

$ 8,230.00

Since Cost of Merchandise is Overstated GP would be Understated.

Net Income

Understated

$ 8,230.00

Since GP is Understated Net Income would also be Understated.

a	Effect of Error on December 31 2014 balance sheet
		Overstated/Understated	Amount	Reason
Merchandise Inventory	Overstated	$ 8,230.00	Actual value is low.
Current Assets	Overstated	$ 8,230.00	Inventory value is high and inventory is a part of Current assets.
Owner\'s Equity	Overstated	$ 8,230.00	Retained earnings will be overstated and retained earnings is a part of Owner’s Equity.
b	Effect of Error on December 31 2014 Income Statement
		Overstated/Understated	Amount	Reason
Cost of Merchandise Sold	Understated	$ 8,230.00	Closing inventory is higher than actual that is why cost of merchandise sold would be understated.
Gross Profit	Overstated	$ 8,230.00	Due to Understated cost of Merchandise sold Gross profit would be overstated.
Net Income	Overstated	$ 8,230.00	Due to Overstated Gross profit Net Income would also be Overstated.
c	Effect of Error on December 31 2015 Income Statement
		Overstated/Understated	Amount	Reason
Cost of Merchandise Sold	Overstated	$ 8,230.00	Opening Merchandising inventory would be overstated hence cost of merchandise is overstated.
Gross Profit	Understated	$ 8,230.00	Since Cost of Merchandise is Overstated GP would be Understated.
Net Income	Understated	$ 8,230.00	Since GP is Understated Net Income would also be Understated.