Question

Effect of Errors in Physical Inventory Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies...

Effect of Errors in Physical Inventory

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $400,970 instead of the correct amount of $384,930.

Enter all amounts as positive numbers.

a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

Balance Sheet Items Overstated/Understated Amount
Merchandise Inventory $
Current Assets
Total Assets
Owner's Equity

b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

Income Statement Items Overstated/Understated Amount
Cost of Merchandise Sold $
Gross Profit
Net Income

c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?

Income Statement Items Understated/Overstated Amount
Cost of Merchandise Sold $
Gross Profit
Net Income

d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

  1. The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
  2. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.
  3. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Homework Answers

Answer #1
Amount of error 16040 =400970-384930
a
Balance Sheet Items Understated/Overstated Amount
Merchandise Inventory Overstated 16040
Current Assets Overstated 16040
Total Assets Overstated 16040
Owner's Equity Overstated 16040
b
Income Statement Items Understated/Overstated Amount
Cost of Merchandise Sold Understated 16040
Gross Profit Overstated 16040
Net Income Overstated 16040
c
Income Statement Items Understated/Overstated Amount
Cost of Merchandise Sold Overstated 16040
Gross Profit Understated 16040
Net Income Understated 16040
d
The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
Option 1 is correct
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