Question

Two similar Questions: I know the answer, but need EXPLAINATIONS! Thanks!

first answer is B and second answer is C.

1. Risers Inc. reported total assets of $2,400,000 and net income of $320,000 for the current year. Risers determined that inventory was overstated by $24,000 at the beginning of the year (this was not corrected). What is the corrected amount for total assets and net income for the year?

a. $2,400,000 and $320,000.

b. $2,400,000 and $344,000.

c. $2,376,000 and $296,000.

d. $2,424,000 and $344,000.

2. Risers Inc. reported total assets of $6,400,000 and net income of $510,000 for the current year. Risers determined that inventory was understated by $138,000 at the beginning of the year and $60,000 at the end of the year. What is the corrected amount for total assets and net income for the year?

a. $6,460,000 and $570,000.

b. $6,340,000 and $588,000.

c. $6,460,000 and $432,000.

d. $6,400,000 and $510,000.

Answer 1

1.

in given case, opening balance of inventory only overstated. it will not make any impact or not required any adjustment on inventory since balance sheet will disclose only ending inventory value. net income already reported $24,000 short in net income. so need to add same on net income

So answer is : b. $2,400,000 and $344,000.

2.

Opening stock being understated results in the Net income decreasing and closing stock being understated results in the Net income increasing by the same amount. So, net effect on net income by understating of opening and closing stock will be $138,000 - $60,000= $78,000 increase in the net income due to wrong valuation.

Since opening stock will not appear in balance sheet, so total assets are only understated by the balance of closing inventory

Answer is: c. $6,460,000 and $432,000.