In Early 2013, Darwin's Pet Shop Discovered That Some of Its

question 128

Essay

In early 2013, Darwin's Pet Shop discovered that some of its inventory of puppies were not what the supplier purported them to be. 550 puppies that were supposed to be purebred (and therefore expensive)were in fact sired by parents with unknown history. As at the fiscal year ended December 31, 2012, 300 of these puppies had been sold while 250 remained in inventory. Purebred puppies cost $140 each and they would retail for $415. Non-purebreds have replacement cost of $30 each, and the estimated sale price is $100 each. Darwin is pursuing the supplier to obtain a refund for the cost difference. However, whether there will be compensation is uncertain.
Required:
a. Record the journal entry for the write-down of puppy inventory on December 31, 2012. Note any assumptions necessary.
b. Suppose the error (non-purebreds treated as purebreds)had not been discovered. Indicate the effect of this error on the following accounts (i.e., were they over- or understated, and by how much?):
i. Inventory, December 31, 2012;
ii. Cost of goods sold, year 2012; and
iii. Cost of goods sold, year 2013.
Note: The owners of Darwin's Pet Shop do not intend to disclose the puppy inventory error to the buyers of the 300 puppies, nor do they intend to compensate them. This is clearly an ethical issue, but it is not a factor in this question.

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