PE 7-6B Effect of inventory errors

During the taking of its physical inventory on December 31, 2012, Russian Bath Company
incorrectly counted its inventory as $580,000 instead of the correct amount of $545,000.
Indicate the effect of the misstatement on Russian Bath’s December 31, 2012, balance
sheet and income statement for the year ended December 31, 2012.

Answer:
                                                      Amount of Misstatement
                                                Overstatement (Understatement)
Balance Sheet:  
Merchandise inventory overstated*.............. $35,000  
Current assets overstated............................. 35,000  
Total assets overstated ................................. 35,000  
Owner’s equity overstated ............................ 35,000  

Income Statement:  
Cost of merchandise sold understated........ $(35,000)  
Gross profit overstated.................................. 35,000  
Net income overstated................................... 35,000  

*($580,000 – $545,000 = $35,000)

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