Question

In early 2018 you are hired as the new Controller for ABC, Co. You discover a variety of inventory errors. ABC uses the periodic method and uses a Purchases account to accumulate inventory purchases during the year. ABC has a 12/31 year end.

1. Purchases in 2016 are overstated by $10,000 since an invoice was entered and paid twice in error. The error was discovered in 2017 and the vendor gave the company a refund in 2017 for the overpayment. The company credited Purchases in 2017 when the refund was processed.

2. The physical count of inventory at 12/13/16 is understated by $30,000.

3. Purchases in 2017 are understated by $6,000. These items were received in December 2017, but were recorded in the Purchases Account in January 2018 when the invoice was paid.

4. The physical count of ending inventory at 12/31/17 is understated by $24,000.

5. A shipment to a customer left ABC’s warehouse on 12/27/2017 and was in transit on 12/31/2017 and was not included in ABC’s ending inventory. This shipment had terms 2/10, n/30, FOB shipping point.

6. Ending inventory as reported in the 2017 Annual Report amounted to $300,000. The 2017 Annual Report was issued before the above errors were identified.

Prepare the necessary prior period adjustments at 1/1/2018 related to the above items and any other correcting journal entry which may be required in 2018.

Answer 1

1)	Vendor A/c		10000
	To Purchases A/c			10000
	The opening inventory of 2017 will be overstated because of this, hence Closing stock of 2017 has to be reduced by $10000 by passing the above entry. Therefore opening inventory for 2018 will be increasd
2)	Opening Inventory of 2017 will be understated hence closing stock will also be understated by 30000. Therefore closing stock of 2017 has to be increased.
3)	No adjustement will be done. Since inventory is received in January next year. Invoice is received (assumption) and paid in January next year.
4)	Closing stock of 2017 will be increased by $24000. Therefore opening stock of 2018 will be increased.
5)	GIT amount will not be included in the closing inventory of ABC because as per the credit terms, ABC is required to pay vendor within 30 days. Assumption- Vendor is not making payment within 10 days to avail discount.
6)	Updated closing inventory of 2017
	Opening	300000
	1)	-10000
	2)	+30000
	3)	-
	4)	+24000
	5)	-
	Closing	344000