Question

Effect of Errors in Physical Inventory Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies...

  1. 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 $156,640 instead of the correct amount of $150,370.

    Enter all amounts as positive numbers.

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

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

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

    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 $
    Gross Profit $
    Net Income $

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

    1. The December 31, 20Y2, balance sheet would be correct, since the 20Y1 inventory error reverses itself in 20Y2.
    2. In the December 31, 20Y2, balance sheet, inventory would be understated.
    3. In the December 31, 20Y2, balance sheet, inventory would be overstated.
    4. In the December 31, 20Y2, balance sheet, retained earnings would be understated.

Homework Answers

Answer #1

Answer-

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

Balance Sheet Items Overstated/Understated Amount
Inventory Overstated $6,270
Current Assets Overstated $6,270
Total Assets Overstated $6,270
Stockholders’ Equity Overstated $6,270

Amount=$156,640- $150,370

=$6,270

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 Overstated/Understated Amount
Cost of Goods Sold Understated $6,270
Gross Profit Overstated $6,270
Net Income Overstated $6,270

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 $6,270
Gross Profit Understated $6,270
Net Income Understated $6,270

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

The correct option is 1-The December 31, 20Y2, balance sheet would be correct, since the 20Y1 inventory error reverses itself in 20Y2.

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