Question

A company’s income statement for the year ended December 31, 2015 showed a net income of...

A company’s income statement for the year ended December 31, 2015 showed a net income of $83,600. Before releasing the financials the auditor found that $18,000 paid for the purchase of a truck had been debited in error to the inventory account. The company adopts the specific identification method with respect to its inventory cost flow assumption, and the truck was not sold during the year of 2015. It is the company’s policy to depreciate trucks at 25% per year on the straight line basis, with a full year’s charge in the year of acquisition. Assume that there is zero residual value for the truck. What would the net income be after adjusting for this error? Can you please help me, thanks!

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Answer #1

Solution :

Cost of Purchases of truck has been charged to inventory and company is following specific identification method in its inventory cost flow assumtion.

The effect of the this transaction has no effect on income as it has been included in Purchases as well as Closing Inventory.

For rectifying this error company will record the prurchases of Truck and depreciation will be charged.

Net Income before error : $ 83,600

Less : Depreciation ($ 18,000 * 25%) : $ 45,00

Income after adjustment : $ 79,100

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