Question

A company’s Dec. 31^st year-end balance sheet showed $72,000 of inventory.   The company uses theperpetual inventory system. After reviewing the company’s records, the auditor noted the following items which had not been included when calculating this amount because it was not in the warehouse during the physical count:

On Dec. 31^st the company was notified that $12,600 of inventory purchased on account from a wholesaler had been shipped on Dec. 30^th, FOB shipping point. No journal entry recorded.

On Dec. 31^st, inventory costing $5,200 was shipped to a customer in Australia FOB destination. Sales Revenues were recorded at 50% mark-up on cost.

  

On Dec. 31^st, inventory costing $14,000 was shipped to a customer FOB shipping point. Sales Revenues were recorded at 50% mark-up on cost.

Determine the effect of these errors on the company’s financial statements as of Dec. 31, CY

1.If Assets are understated, enter your answer as a negative number; for instance: -3000

If Assets are overstated, enter your answer as a positive number; for instance: 3000

If Assets are okay; enter 0

2.If Liabilities are overstated, enter your answer as a positive number; for instance: 3000

If Liabilities are understated , enter your answer as a negative number; for instance: -3000

If Liabilities are okay; enter 0

3.If Equity is overstated, enter your answer as a positive number; for instance: 3000

If Equity is understated, enter your answer as a negative number; for instance: -3000

If Equity is okay; enter 0

4.If Net Income is overstated, enter your answer as a positive number; for instance: 3000

If Net Income is understated, enter your answer as a negative number; for instance: -3000

If Net Income is okay; enter 0

Please list all journal entries for each step because I am not sure about how to decide which step should be recorded, Thanks for your help!!

Answer 1

EFFECTS OF EACH TRANSACTIONS
S.NO.	Paticulars					Inventory	Accounts	Accounts	Equity
							Receivable	Payable
1	Goods Purchased FOB shipping not recorded					12600		12600
	(Purchase n FOB shipping terms shall be recorded)
2	Goods sold FOB destination					5200	-7800		-2600
	(sales recorded need to be reversed)
	(Cost price $ 5200 and Sales pricec $7800)
	EFFECTS ON EACH ACCOUNT					17800	-7800	12600	-2600
REQ1.
Assets were understated by:
Inventory understated by				17800
Accounts receivable overstated by				-7800
Total assets understated by				10000
Req 2:
Liabilities Understated by $ 12,600 (Accounts payable)
Req 3:
Equity Overstated by $2600 (Retained earnings)
Req4:
Income Overstated by $ 2600 (difference between cost and sales price i.e. 7800-5200)