Question

When preparing its financial statements at the end of 2018, Bestway Retail Inc. discovered an error in accounting for inventory.

When Bestway started to purchase merchandise from a new supplier, it expensed all transportation costs rather than capitalizing them as a cost of the inventory. It estimated that a portion of the transportation costs were erroneously expensed in 2017 and 2018. Transportation costs were $327,000 and $334,000 in fiscal 2017 and 2018, respectively. The company expensed all of the transportation costs in the year incurred, when it should have capitalized a portion of the costs as ending inventory. Bestway determined that 90% of the inventory purchases in 2017 was sold in 2017 and 92% of the inventory purchased in 2018 was sold in 2018. Assume all inventory on hand at the beginning of the year is sold during the year. Assume no tax implications.

Not Restated	2016	2017	2018
Net Income	$ 260,000	$ 295,000	$ 320,000
Cost of goods sold	5,014,000	5,330,000	5,589,000
Inventory, 12/31	473,500	259,500	269,000
Retained earnings, 12/31	4,756,000	5,020,000	5,028,000

Requirement A.

Would net income have been higher or lower in 2017, and by how much? What will Besway report as net income in 2018?

In 2017, net income would have been higher or lower by $__________.

In 2018, Bestway will report net income as $_________.

Requirement B.

What would Bestway report as its inventory and retained earning balances at the beginning of 2018 and at December 31, 2018? (Round intermediary calculations and final answers to the nearest whole dollar.)

At the beginning of 2018, Bestway would report inventory as $_________.

At the end of 2018, Bestway would report inventory at $________.

At the beginning of 2018, Bestway would report retained earnings as $_______.

At the end of 2018, Bestway would report retained earnings as $_________.

Requirement C.

Prepare the retained earnings portions of the statement of stockholders equity for 2018. (use a minus sign or parentheses for any amounts to be subtracted.)

Stockholders' Equity- Retained Earnings

Retained Earnings, January 1, 2018	?$$$
Prior Period Adjustment	?$$$
Retained Earnings, as Restated	?$$$
Net Income	?$$$
Dividends	?$$$
Retained Earnings, December 31, 2018	?$$$

Requirement D.

What is the necessary journal entry to record the prior-period adjustment in 2018?

Account	Current	Year- 2018
Inventory	$???
Retained Earnings - Prior Adjustment		$???

Answer 1

			With Transportation
	2017	2018		2017	2018
Beginning Balance	$     473,500	$     259,500		$     473,500	$     544,300
Purchases	$ 5,116,000	$ 5,598,500		$ 5,443,000	$ 5,932,500
COGS	$ 5,330,000	$ 5,589,000		$ 5,372,200	$ 6,002,200
Ending Inventory	$     259,500	$     269,000		$     544,300	$     474,600

Calculation

			With Transportation
	2017	2018		2017	2018
Beginning Balance	473500	259500		473500	=E6
Purchases	=B5+B6-B3	=C5+C6-C3		=5116000+327000	=5598500+334000
COGS	5330000	5589000		=(0.9*E4)+E3	=(0.92*F4)+F3
Ending Inventory	259500	269000		=E3+E4-E5	=F3+F4-F5

A.

COGS would have been higher and Transportation expenses will be eliminated.

In 2017, net income would have been higher by $284,800

In 2018, Bestway will report the net income as $240,800

B.

At the beginning of 2018, Bestway would report inventory as $544,300

At the end of 2018, Bestway would report inventory at $474,600

At the beginning of 2018, Bestway would report retained earnings as $5,304,800

At the end of 2018, Bestway would report retained earnings as $4,948,800

C.

Retained Earnings Jan 1 2018	$ 5,020,000.00
Prior Period Adjustment	$      284,800.00
Retained Earnings, as Restated	$ 5,304,800.00
Net Income	$      240,800.00
Dividends (B/F)	$      596,800.00
Retained Earnings Dec 31 2018	$ 4,948,800.00

D.

	Debit	Credit
Inventory	$      205,600.00
Net income	$        79,200.00
Retained Earnings - Prior adjustment		$ 284,800.00