Question

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 $224,990 instead of the correct amount of $215,990.

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?

The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.

The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.

The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Answer 1

A)

Merchandise inv.	Overstated	$9000
Current assets	overstated	$9000
Total assets	overstated	$9000
Ownrrs equity	overstated	$9000

B)

Cost of merchandise	no effect	-
Gross profit	overstated	$9000
Net income	overstated	$9000

C)

Cost of merchandise	no effect
Gross profit	understated	$9000
Net income	understated	$9000

D)

Balance sheet would be incorrect since the 20Y8 inventory error understated the inventory in 20Y9

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