Question

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 physical count. A third purchase, shipped from a supplier FOB shipping point on December 28, 2018, did not arrive until January 3, 2019. The merchandise, which cost $91,000, was not included in the physical count and the purchase has not yet been recorded.

The company uses a periodic inventory system.

Required:
1. Determine the correct December 31, 2018, inventory balance and, assuming that the errors were discovered after the 2018 financial statements were issued, analyze the effect of the errors on 2018 cost of goods sold, net income, and retained earnings. (Ignore income taxes.)
2. Prepare a journal entry to correct the errors.

Required 1: Effect Amount

Correct End Inv

COGS

Net Income

Retained Earnings

Answer 1

Inventory as of 12.31.2018           461000

Inventory not received in 2018    -25500

Purchase not recorded yet         91000(46100-25500)

correct Total inventory as of 12.31.2018 ---->526500

               

               

correct inventory as of 12.31.2018            526500

reported inventory         461000

cost reported less            65500 (526500-461000)

               

since the cost was reported less this has inflated the net profits and reduced the COGS and increased the retained earnings

               

Inventory            65500

To COGS              65500