Question

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 $189,550 instead of the correct amount of $181,970. 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? The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Answer 1

Fonda Motorcycle Shop

1. Effect of the error on the Dec 31, 20Y8 balance sheet:

Incorrect amount = $189,550

Correct amount = $181,970

Difference = $7,580

Inventory value on the balance sheet is overstated by $7,580.

Current assets overstated by $7,580.

Total assets overstated by $7,580.

Owner’s equity overstated by $7,580.

1. Effect of the error on the income statement for the year ended Dec 31, 20Y8:

The excess amount of $7,580 should have been debited to Cost of Goods Sold.

Cost of merchandise sold understated by $7,580.

Gross profit is overstated by $7,580.

Net income is overstated by $7,580.

1. Effect of the error on the income statement for the year ended Dec 31, 20Y9, if uncorrected:

Cost of merchandise sold would be overstated by $7,580.
Gross profit is understated by $7,580.

Net income is understated by $7,580.

1. Effect of the error on the Dec 31, 20Y9 balance sheet:

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