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 $297,480 instead of the correct amount of $285,580.

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.

Answer 1

Incorrect Reported Inventry-$297480

Actual Inventory-$285580

Difference-$11900

a	Balance Sheet Items	Overstated/Understated	Amount
	Inventory	Overstated	11900
	Current Assets	Overstated	11900
	Total Assets	Overstated	11900
	Stockholders’ Equity	Overstated	11900
b	Income Statement Items	Overstated/Understated	Amount
	Cost of Goods Sold	Understated	11900
	Gross Profit	Overstated	11900
	Net Income	Overstated	11900
c	Income Statement Items	Understated/Overstated	Amount
	Cost of Goods Sold	Overstated	11900
	Gross Profit	Understated	11900
	Net Income	Understated	11900

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

.