Question

Navajo Company’s financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Year 1 ending inventory is understated by $59,000, and Year 2 ending inventory is overstated by $29,000.

For Year Ended December 31		Year 1		Year 2		Year 3
(a)	Cost of goods sold	$	734,000	$	964,000	$	799,000
(b)	Net income		277,000		284,000		259,000
(c)	Total current assets		1,256,000		1,369,000		1,239,000
(d)	Total equity		1,396,000		1,589,000		1,254,000

Required:
1. For each key financial statement figure—(a), (b), (c), and (d) below—prepare a table to show the adjustments necessary to correct the reported amounts.
2. What is the total error in combined net income for the three-year period resulting from the inventory errors?

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• Required 1
• Required 2

For each key financial statement figure—(a), (b), (c), and (d) below—prepare a table to show the adjustments necessary to correct the reported amounts. (Amounts to be deducted must be entered with a minus sign.)

Year 1 Year 2 Year 3 Cost of goods sold: Reported amount Adjustments for: 12/31/Year 1 error 12/31/Year 2 error Corrected amount Net income: Reported amount Adjustments for: 12/31/Year 1 error 12/31/Year 2 error Corrected amount Total current assets: Reported amount Adjustments for: 12/31/Year 1 error 12/31/Year 2 error Corrected amount Equity: Reported amount Adjustments for: 12/31/Year 1 error 12/31/Year 2 error Corrected amount

Answer 1

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Navajo Company		Year 1	Year 2	Year 3		Remarks
Cost of goods sold:
Reported amount		734,000.00	964,000.00	799,000.00
Adjustments for:	12/31/Year 1 error	(59,000.00)				Year 1 ending inventory is understated by $59,000 so cost of goods sold is overstated by $ 59,000 hence reduced.
	12/31/Year 2 error		29,000.00			Year 2 ending inventory is overstated by $29,000 so cost of goods sold is understated by $ 29,000 hence increased.
Corrected amount		675,000.00	993,000.00	799,000.00
Net income:
Reported amount		277,000.00	284,000.00	259,000.00
Adjustments for:	12/31/Year 1 error	59,000.00				Year 1 ending inventory is understated by $59,000 so cost of goods sold is overstated by $ 59,000 which means income is understated by $59,000 hence increased.
	12/31/Year 2 error		(29,000.00)			Year 2 ending inventory is overstated by $29,000 so cost of goods sold is understated by $ 29,000 which means income is overstated by $29,000 hence reduced.
Corrected amount		336,000.00	255,000.00	259,000.00
Total current assets:
Reported amount		1,256,000.00	1,369,000.00	1,239,000.00
Adjustments for:	12/31/Year 1 error	59,000.00	59,000.00			Year 1 ending inventory is understated by $59,000 so assets is understated by $59,000 hence increased.
	12/31/Year 2 error		(29,000.00)	(29,000.00)		Year 2 ending inventory is overstated by $29,000 so assets is overstated by $29,000 hence reduced.
Corrected amount		1,315,000.00	1,399,000.00	1,210,000.00
Equity:
Reported amount		1,396,000.00	1,589,000.00	1,254,000.00
Adjustments for:	12/31/Year 1 error	59,000.00	59,000.00			Income is increased by $59,000 so equity will also increase by $59,000.
	12/31/Year 2 error		(29,000.00)	(29,000.00)		Income is decreased by $29,000 so equity will also decrease by $29,000.
Corrected amount		1,455,000.00	1,619,000.00	1,225,000.00