Question

You worked as an intern for Nitty-Gritty LLC, a public auditing firm. During the course of your examination of the 2013financial statements of Oregon Company, you discovered the following error in its inventory balance:

The 2013 beginning-of-year inventory was overstated by $23,000

The 2013 end-of-year inventory was understated by $50,000

Net income reported on the 2013 income statement (before reflecting any adjustments for the above items) is $150,000.

Assume closing entries have not been made and the 2013 financial statements have not been issued yet.

a.What is the correct net income for 2013?

b.What correcting journal entries should be made for the above inventory errors?

Answer 1

We know,	COGS = Beginning Inventory + Purchases - Ending Inventory
Beginning Inventory
Beginning Inventory overstatement by				$   23,000.00
Therefore, COGS overstated by				$   23,000.00
and, Net Income understated by				$   23,000.00
Ending Inventory
Ending Inventory understated by				$   50,000.00
Therefore, COGS overstated by				$   50,000.00
and, Net Income understated by				$   50,000.00
Net Effect
COGS is overstated by				$   73,000.00	($ 23000 + $ 50000)
and Net Income is understated by				$   73,000.00	($ 23000 + $ 50000)

a)

Therefore, correct Net Income is

$ 223,000.00

($ 150000 + $ 73000)

b)	Correcting Journal Entry
	Particulars			Debit	Credit
	Inventory			$ 73,000.00
	To Cost of Goods sold				$ 73,000.00

Is this okay?