Question

In: Accounting

Armstrong Inc. did a physical inventory count and accidentally overstated ending inventory on the 12/31/18 financial...

Armstrong Inc. did a physical inventory count and accidentally overstated ending inventory on the 12/31/18 financial statement by $20,000. The company noticed the error during 2020, before books were closed. The 2020 inventory was not affected since physical inventory was adequately counted. How would Armstrong Inc correct this error in 2020, assume a 21% tax rate.

Credit Retained Earnings by $15,800.
No adjustment necessary since it fixed itself.
Debit Retained Earnings by $15,800.

Credit Inventory by $20,000

On January 1, 2020, Bubble Corporation signed a five-year noncancelable lease to obtain a bubble machine. The terms of the lease called for Bubble to make annual payments of $90,000 at the beginning of each year for 5 years. The equipment has an estimated useful life of 7 years and no salvage value. Bubbles effective interest rate is 10%. The fair value on Jan. 1, 2020 of the asset is $500,000. With respect to this lease, what should Bubble record for 2020?

A capital lease
An operating lease
A sales-type lease
A direct-financing lease

Solutions

Expert Solution

Answer
(Part one)
Inventory Error always having two year effect. As in this case overstated ending inventory as on 31.12.2018 by $20,000
having second effect during 2019 by overstated beginning Inventory by $ 20,000. Therefore, it can say overstated income
of 2018 got offset during 2019 by same amount. So No adjustment necessary since it fixed itself.
(Part Two)
These are some ofindication to define the lease shall for being as "Capital Lease" otherwise " Operating lease"-
1) Ownership is transferred by the end of lease term - Not Complied as there is no any option available at the end of lease.
2) Lease term is equal to 75% or more than economic life of leased assets - 71.42 as not complied
3) Present Value of Minimum Lease Payment is 90% or more of fair value of leased asset- 75.05 % as not complied
Lease term % of Useful Life of Assets = (5/7*100) = 71.42%
Calculation of Present Vale Lease Payment
Year Advance Payment Dis. Factor @10% Discounted Value
0 90000 1.00          90,000
1 90000 0.91          81,818
2 90000 0.83          74,380
3 90000 0.75          67,618
4 90000 0.68          61,471
5 0 0.62                   -  
Present Value of Min. Lease Payment      3,75,288
MLP % of Fair value (375288/500000*100) = 75.05%
As not complied by Capital Lease, So it is An Operating Lease .
As there is a term of lease not for sale so option of sale type lease is wrong option and
direct finance lease option is not valid as it does not satisfied capital lease complied condition.

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Gross profit method of estimating inventory. Leia completed a physical inventory on 12-31-18. On the basis...
Gross profit method of estimating inventory. Leia completed a physical inventory on 12-31-18. On the basis of her count, Leia determined her ending inventory to be $416,750. In recent years, Leia's gross profit equaled 64% of Leia’s selling price. Additional information from Leia’s accounting records identified the following: Inventory, 12-31-17                                                                                                             $320,000 Purchases during 2018                                                                                                     $1,208,000 Purchase returns during 2018                                                                                               $44,000 Purchase discounts during 2018                                                                                            $9,664 Sales during 2018                                                                                                              $3,066,000 Sales returns during 2018                                                                                                   $160,000 Leia suspects some inventory is missing. Leia used the gross profit method...
If the ending inventory of a firm is overstated by $55,000, by how much and in...
If the ending inventory of a firm is overstated by $55,000, by how much and in what direction (overstated or understated) will the firm's operating income be misstated? (use the cost of goods sold model, enter hypothetically "correct" data, ann then reflect the effects of the ending inventory error, and determine the effect on cost of goods sold
Marshall company discovers in 2014 that its ending inventory at December 31, 2013 was $5000 overstated....
Marshall company discovers in 2014 that its ending inventory at December 31, 2013 was $5000 overstated. What effect will this error have on (a) 2013 net income,(b) 2014 net income, (c) the combines net income for two years?
Effects of inventory error  Assume that the ending inventory of a merchandising firm is overstated by...
Effects of inventory error  Assume that the ending inventory of a merchandising firm is overstated by $30,000. Required: a)By how much and in what direction (overstated or understated) will the firm’s cost of goods sold be misstated? b)If this error is not corrected, what effect will it have on the subsequent period’s operating income? c)If this error is not corrected, what effect will it have on the total operating income of the two periods (the period in which there is...
which of the following methods can be used to estimate ending inventory when a physical count...
which of the following methods can be used to estimate ending inventory when a physical count is not possible: 1. lower of cost or market 2. FIFO 3. perpetual cost 4. gross profit Explain the answer in detail.
The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to...
The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $460,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $60,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $25,000 was correctly recorded as a purchase in 2018. However, the merchandise, shipped FOB shipping point, was not received until 2019 and was incorrectly omitted from the...
The December 31, 2021, inventory of Tog Company, based on a physical count, was determined to...
The December 31, 2021, inventory of Tog Company, based on a physical count, was determined to be $465,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $65,000. The purchase was recorded and paid for in 2022. Another supplier shipment costing $27,500 was correctly recorded as a purchase in 2021. However, the merchandise, shipped FOB shipping point, was not received until 2022 and was incorrectly omitted from the...
The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to...
The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $461,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $61,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $25,500 was correctly recorded as a purchase in 2018. However, the merchandise, shipped FOB shipping point, was not received until 2019 and was incorrectly omitted from the...
Royal Corporation’s inventory at December 31, 2021, was $126,000 (at cost) based on a physical count...
Royal Corporation’s inventory at December 31, 2021, was $126,000 (at cost) based on a physical count of inventory on hand, before any necessary adjustment for the following: Merchandise costing $16,000, shipped f.o.b. shipping point from a vendor on December 27, 2021, was received by Royal on January 5, 2022. Merchandise costing $46,000 was shipped to a customer f.o.b. shipping point on December 28, 2021, arrived at the customer’s location on January 6, 2022. Merchandise costing $22,000 was being held on...
The Mateo Corporation's inventory at December 31, 2020, was $325,000 based on a physical count priced...
The Mateo Corporation's inventory at December 31, 2020, was $325,000 based on a physical count priced at cost, and before any necessary adjustment for the following: Merchandise costing $30,000, shipped F.o.b. shipping point from a vendor on December 30, 2020, was received on January 5, 2021. Merchandise costing $22,000, shipped F.o.b. destination from a vendor on December 28, 2020, was received on January 3, 2021. Merchandise costing $38,000 was shipped to a customer F.o.b. destination on December 28, 2020, arrived...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT