Question

1. Effect of Errors in Physical Inventory

   Madison River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y8, Madison incorrectly counted its inventory as $462,630 instead of the correct amount of $476,510.

   Enter all amounts as positive numbers.

   a. State the effects of the error on the December 31, 20Y8, balance sheet of Madison River Supply.

   Balance Sheet Items	Understated/Overstated	Amount
   Inventory		$fill in the blank 2
   Current Assets		$fill in the blank 4
   Total Assets		$fill in the blank 6
   Stockholders’ Equity		$fill in the blank 8

   b. State the effects of the error on the income statement of Madison River Supply for the year ended December 31, 20Y8.

   Income Statement Items	Overstated/Understated	Amount
   Cost of Goods 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 effects of the error on the 20Y9 income statement?

   Income Statement Items	Overstated / Understated	Amount
   Cost of Goods 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 effects of the error on the December 31, 20Y9, balance sheet?

   1. The balance sheet would be correct, because the 20Y8 inventory error reverses itself in 20Y9.
   2. The income for 20Y9 would be understated.
   3. The current assets in 20Y9 would be overstated.
   4. The current assets in 20Y9 would be understated.

Answer 1

Amount of error	13880	=476510-462630
a
Balance Sheet Items	Understated/Overstated	Amount
Inventory	Understated	13880
Current Assets	Understated	13880
Total Assets	Understated	13880
Stockholders’ Equity	Understated	13880
b
Income Statement Items	Understated/Overstated	Amount
Cost of Goods Sold	Overstated	13880
Gross Profit	Understated	13880
Net Income	Understated	13880
c
Income Statement Items	Understated/Overstated	Amount
Cost of Goods Sold	Understated	13880
Gross Profit	Overstated	13880
Net Income	Overstated	13880

d

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

Option 1 is correct