EX 7-14 Effect of errors in physical inventory

Eclipse Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories.
During the taking of its physical inventory on December 31, 2012, Eclipse Motorcycle
Shop incorrectly counted its inventory as $350,000 instead of the correct amount
of $338,000.

a. State the effect of the error on the December 31, 2012, balance sheet of Eclipse Motorcycle
Shop.
b. State the effect of the error on the income statement of Eclipse Motorcycle Shop for
the year ended December 31, 2012.
c. If uncorrected, what would be the effect of the error on the 2013 income statement?
d. If uncorrected, what would be the effect of the error on the December 31, 2013, balance
sheet?

Answer:
a.                                                    Balance Sheet  
Merchandise inventory............. $12,000* overstated  
Current assets .......................... $12,000 overstated
Total assets............................... $12,000 overstated
Owner’s equity.......................... $12,000 overstated  
*$12,000 = $350,000 – $338,000

b.                                                  Income Statement  
Cost of merchandise sold........ $12,000 understated
Gross profit............................... $12,000 overstated
Net income................................ $12,000 overstated

c.                                                Income Statement  
Cost of merchandise sold........ $12,000 overstated
Gross profit............................... $12,000 understated
Net income................................ $12,000 understated

d. The December 31, 2013, balance sheet would be correct, since the 2012 inventory error reverses itself in 2013.

Popular posts from this blog

PR 9-2A Aging of receivables; estimating allowance for doubtful accounts

Image
Angler’s Dream Company supplies flies and fishing gear to sporting goods stores and outfitters throughout the western United States. The accounts receivable clerk for Angler’s Dream prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 2011: The following accounts were unintentionally omitted from the aging schedule: Customer                                            Due Date                        Balance  Antelope Sports & Flies                June 21, 2011                      $ 3,000  Big Hole Flies                               Aug. 30, 2011         ...
Read more

PR 10-5A Transactions for fixed assets, including sale

The following transactions, adjusting entries, and closing entries were completed by D. Hurd Furniture Co. during a three-year period. All are related to the use of delivery equipment. The double-declining-balance method of depreciation is used. 2010 Jan.  9. Purchased a used delivery truck for $30,000, paying cash. Mar. 17. Paid garage $400 for miscellaneous repairs to the truck. Dec. 31. Recorded depreciation on the truck for the year. The estimated useful life of the truck is four years, with a residual value of $6,000 for the truck. 2011 Jan.   2. Purchased a new truck for $48,000, paying cash. Aug   1. Sold the used truck for $12,500. (Record depreciation to date in 2011 for the truck.) Sept. 23. Paid garage $325 for miscellaneous repairs to the truck. Dec. 31. Record depreciation for the new truck. It has an estimated residual value of $11,000 and an estimated life of fi ve years. 2012 July    1. Purchased a new truck for $52,000, paying cash. Oct.   ...
Read more

PR 9-1A Entries related to uncollectible accounts

Image
The following transactions were completed by Axiom Management Company during the current fiscal year ended December 31: Feb.  17. Received 25% of the $30,000 balance owed by Gillespie Co., a bankrupt business, and wrote off the remainder as uncollectible. Apr.  11. Reinstated the account of Colleen Bertram, which had been written off in the preceding year as uncollectible. Journalized the receipt of $4,250 cash in full payment of Colleen’s account. July  6. Wrote off the $9,000 balance owed by Covered Wagon Co., which has no assets. Nov. 20. Reinstated the account of Dugan Co., which had been written off in the preceding year as uncollectible. Journalized the receipt of $5,900 cash in full payment of the account. Dec. 31. Wrote off the following accounts as uncollectible (compound entry): Kipp Co., $3,000; Moore Co., $4,000; Butte Distributors, $8,000; Parker Towers, $6,700.          31. Based on an analysis of the $1,200,000 of accounts receivabl...
Read more