Question

Effect of Errors in Physical Inventory Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y1, Fonda incorrectly counted its inventory as $277,020 instead of the correct amount of $265,940. Enter all amounts as positive numbers. a. State the effects of the error on the December 31, 20Y1, balance sheet of Fonda Motorcycle Shop. Balance Sheet Items Overstated /

Answer 1

Answer:

Current asset(Inventory)/ Asset will be overstated by $11,080. Also, the owners equity (by virtue of the net income) will also be over stated by $11,080.

Explanation:

The overstatement of year end inventory results in the understatement of cost of goods sold which in turn results in an overstatement of the net income.

Hence if Fonda incorrectly counted its inventory as $277,020 instead of the correct amount of $265,940, inventory will be overstated by

= $277,020 - $265,940

= $11,080

This means that the current assets (inventory) would be overstated by $11,080. Also, the owners equity (by virtue of the net income) will also be over stated by $11,080.