Question

1. Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $329,980 instead of the correct amount of $316,780.

   Enter all amounts as positive numbers.

   a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

   Balance Sheet Items	Overstated/Understated	Amount
   Merchandise Inventory		$
   Current Assets
   Total Assets
   Owner's Equity

   b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

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

   c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?

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

   d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

   1. The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
   2. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.
   3. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Answer 1

Correct inventory = $316,780

Incorrect inventory = $329,980

Overstated inventory = Incorrect inventory - Correct inventory

= $329,980 - $316,780

= $13,200

a. Effects of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

Balance Sheet Items	Overstated / Understated	Amount
Inventory	Overstated	$13,200
Current Assets	Overstated	$13,200
Total Assets	Overstated	$13,200
Stockholders’ Equity	Overstated	$13,200

b. Effects of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y9.

Income Statement Items	Overstated / Understated	Amount
Cost of Goods Sold	Understated	$13,200
Gross Profit	Overstated	$13,200
Net Income	Overstated	$13,200

c. If uncorrected, Effects of the error on the 20Y9 income statement

Income Statement Items	Understated / Overstated	Amount
Cost of Goods Sold	Overstated	$13,200
Gross Profit	Understated	$13,200
Net Income	Understated	$13,200

d. If uncorrected, the effects of the error on the December 31, 20Y9, balance sheet would be as under:

The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.

Hence, correct option is 1.