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: Inventory on December 31, 2016, is understated by $56,000, and inventory on December 31, 2017, is overstated by $26,000.

For Year Ended December 31		2016		2017		2018
(a)	Cost of goods sold	$	731,000	$	961,000	$	796,000
(b)	Net income		274,000		281,000		256,000
(c)	Total current assets		1,253,000		1,366,000		1,236,000
(d)	Total equity		1,393,000		1,586,000		1,251,000

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. (Amounts to be deducted must be entered with a minus sign.)

2016 2017 2018 Cost of goods sold: Reported amount $731,000 $961,000 $796,000 Adjustments for: 12/31/2016 error 12/31/2017 error Corrected amount $731,000 $961,000 $796,000 Net income: Reported amount $274,000 $281,000 $256,000 Adjustments for: 12/31/2016 error 12/31/2017 error Corrected amount $274,000 $281,000 $256,000 Total current assets: Reported amount $1,253,000 $1,366,000 $1,236,000 Adjustments for: 12/31/2016 error 12/31/2017 error Corrected amount $1,253,000 $1,366,000 $1,236,000 Equity: Reported amount $1,393,000 $1,586,000 $1,251,000 Adjustments for: 12/31/2016 error 12/31/2017 error Corrected amount $1,393,000 $1,586,000 $1,251,000

2. What is the error in total net income for the combined three-year period resulting from the inventory errors?

Answer 1

1			2016	2017	2018
	Cost of goods sold:
	Reported amount		$731,000	$961,000	$796,000
	Adjustments for:	12/31/2016 error	56000	56000
		12/31/2017 error		26000	26000
	Corrected amount		$675,000	$1,043,000	$770,000
	Net income:
	Reported amount		$274,000	$281,000	$256,000
	Adjustments for:	12/31/2016 error	56000	56000
		12/31/2017 error		26000	26000
	Corrected amount		$330,000	$199,000	$282,000
	Total current assets:
	Reported amount		$1,253,000	$1,366,000	$1,236,000
	Adjustments for:	12/31/2016 error	56000
		12/31/2017 error		26000
	Corrected amount		$1,309,000	$1,340,000	$1,236,000
	Equity:
	Reported amount		$1,393,000	$1,586,000	$1,251,000
	Adjustments for:	12/31/2016 error	56000
		12/31/2017 error		26000
	Corrected amount		$1,449,000	$1,560,000	$1,251,000
2	There is no effect on total net Income for the combined three-year period resulting from the inventory errors.