Question

Effect of Errors in Physical Inventory

Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2, Missouri River Supply incorrectly counted its inventory as $507,150 instead of the correct amount of $522,360.

Enter all amounts as positive numbers.

a. State the effect of the error on the December 31, 20Y2, balance sheet of Missouri River Supply.

Balance Sheet Items	Understated/Overstated	Amount
Merchandise Inventory		$fill in the blank 2
Current Assets		fill in the blank 4
Total Assets		fill in the blank 6
Owner's Equity		fill in the blank 8

b. State the effect of the error on the income statement of Missouri River Supply for the year ended December 31, 20Y2.

Income Statement Items	Overstated/Understated	Amount
Cost of Merchandise Sold		$fill in the blank 10
Gross Profit		fill in the blank 12
Net Income		fill in the blank 14

c. If uncorrected, what would be the effect of the error on the 20Y3 income statement?

Income Statement Items	Overstated/Understated	Amount
Cost of Merchandise Sold		$fill in the blank 16
Gross Profit		fill in the blank 18
Net Income		fill in the blank 20

d. If uncorrected, what would be the effect of the error on the December 31, 20Y3, balance sheet?

1. The December 31, 20Y3, balance sheet would be correct, since the 20Y2 inventory error reverses itself in 20Y3.
2. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error overstates the beginning inventory in20Y3.
3. The December 31, 20Y3, balance sheet would be incorrect, since the 20Y2 inventory error understates the beginning inventory in 20Y3.

Answer 1

Amount of error	15210	=522360-507150
a
Balance Sheet Items	Understated/Overstated	Amount
Merchandise Inventory	Understated	15210
Current Assets	Understated	15210
Total Assets	Understated	15210
Owner's Equity	Understated	15210
b
Income Statement Items	Understated/Overstated	Amount
Cost of Merchandise Sold	Overstated	15210
Gross Profit	Understated	15210
Net Income	Understated	15210
c
Income Statement Items	Understated/Overstated	Amount
Cost of Merchandise Sold	Understated	15210
Gross Profit	Overstated	15210
Net Income	Overstated	15210

d

The December 31, 20Y3, balance sheet would be correct, since the 20Y2 inventory error reverses itself in 20Y3.

Option 1 is correct