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, 20Y1, Fonda incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.

a. State the effects of the error on the December 31, 20Y1, balance sheet of Fonda Motorcycle Shop.

Balance Sheet Items	Understated / Overstated	Amount
Inventory	Overstated	$
Current Assets	Overstated	$
Total Assets	Overstated	$
Stockholders' Equity	Overstated	$

b. State the effects of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y1.

Income Statement Items	Understated / Overstated	Amount
Cost of Goods Sold	Understated	$
Gross Profit	Overstated	$
Net Income	Overstated	$

c. If uncorrected, what would be the effects of the error on the 20Y2 income statement?

Income Statement Items	Understated / Overstated	Amount
Cost of Goods Sold	Overstated	$
Gross Profit	Understated	$
Net Income	Understated	$

d. If uncorrected, what would be the effects of the error on the December 31, 20Y2, balance sheet?

The December 31, 20Y2, balance sheet would be correct, since the 20Y1 inventory error reverses itself in 20Y2.

In the December 31, 20Y2, balance sheet, inventory would be understated.

In the December 31, 20Y2, balance sheet, inventory would be overstated.

In the December 31, 20Y2, balance sheet, retained earnings would be understated

Answer 1

Error amount	8650	=337500-328850
a
Balance Sheet Items	Understated / Overstated	Amount
Inventory	Overstated	8650
Current Assets	Overstated	8650
Total Assets	Overstated	8650
Stockholders' Equity	Overstated	8650
b
Income Statement Items	Understated / Overstated	Amount
Cost of Goods Sold	Understated	8650
Gross Profit	Overstated	8650
Net Income	Overstated	8650
c
Income Statement Items	Understated / Overstated	Amount
Cost of Goods Sold	Overstated	8650
Gross Profit	Understated	8650
Net Income	Understated	8650
d
The December 31, 20Y2, balance sheet would be correct, since the 20Y1 inventory error reverses itself in 20Y2.