Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.
a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.
b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.
c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?
d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?
Answer:
a.
Merchandise inventory*................................................ $8,650 overstated
Current assets............................................................ $8,650 overstated
Total assets............................................................... $8,650 overstated
Owner’s equity............................................................ $8,650 overstated
* $8,650 = $337,500 – $328,850
b.
Cost of merchandise sold............................................. $8,650 understated
Gross profit............................................................... $8,650 overstated
Net income.................................................................. $8,650 overstated
c.
Cost of merchandise sold............................................. $8,650 overstated
Gross profit............................................................... $8,650 understated
Net income.................................................................. $8,650 understated
d. The December 31, 20Y9, balance sheet would be correct, since the 20Y8
inventory error reverses itself in 20Y9.