For Each of the Following Independent Scenarios, Indicate the Effect

question 16

Essay

For each of the following independent scenarios, indicate the effect of the error (if any)on:
i. 2012 net income;
ii. 2013 net income; and
iii. 2013 closing retained earnings.
The company uses the periodic system of inventory and its fiscal year-end is December 31. Ignore income tax effects. Consider each of the following independent scenarios:
a. Your analysis of inventory indicates that inventory at the end of 2012 was overstated by $27,000 due to an inventory count error. Inventory at the end of 20 13 was correctly stated.
b. Invoices in the amount of $107,000 for inventory received in December 2012 were not entered on the books in 2012. They were recorded as purchases in January 2013 when they were paid. The goods were counted in the 2012 inventory count and included in ending inventory on the 2012 financial statements.
c. Goods received on consignment amounting to $89,000 were included in the physical count of goods at the end of 2013 and included in ending inventory on the 2013 financial statements.
d. For each of the three scenarios, provide the journal entry that should be recorded in 2013 to correct the error.

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Definitions:

Securities Act

A federal law enacted to regulate the offer and sale of securities to protect investors from fraud.

Securities and Exchange Commission

A U.S. federal agency responsible for enforcing federal securities laws and regulating the securities industry, stock and options exchanges.

Securities and Exchange Act

A U.S. law enacted in 1934 to regulate securities transactions on the secondary market, thereby protecting investors and maintaining fair and efficient functioning of the securities markets.

New York Stock Exchange

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