Question

The December 31, 2018, inventory of Tog Company, based on a physical count, was determined to be $470,000. Included in that count was a shipment of goods received from a supplier at the end of the month that cost $70,000. The purchase was recorded and paid for in 2019. Another supplier shipment costing $30,000 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 $100,000, 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.)

Answer 1

Answer:

$600,000; $40,000 (understated); Reduced by $40,000; Reduced by $40,000.

Explanation:

Given that,

Physical count = $470,000

Cost of shipment of goods received = $70,000

Another supplier shipment costing = $30,000

Merchandise cost = $100,000

Correct December 31, 2018, inventory balance:

= Physical inventory + Merchandise inventory (FOB)

= $470,000 + ($30,000 + $100,000)

= $470,000 + $130,000

= $600,000

Change in cost of goods sold:

= Change in net purchase(Understated) + Change in ending inventories

= [$70,000 + $100,000] + (-$130,000)

= $170,000 - $130,000

= $40,000 (Understated)

Net income reduced by $40,000 and also, the retained earnings reduced by $40,000.