Question

At December 31, 2019, Elizabeth Brown Corporation reported current assets of $384,510 and current liabilities of $212,400. The following items may have been recorded incorrectly. 1. Goods purchased costing $21,860 were shipped f.o.b. shipping point by a supplier on December 28. Brown received and recorded the invoice on December 29, 2019, but the goods were not included in Brown's physical count of inventory because they were not received until January 4, 2020. 2. Goods purchased costing $14,970 were shipped f.o.b. destination by a supplier on December 26. Brown received and recorded the invoice on December 31, but the goods were not included in Brown's 2019 physical count of inventory because they were not received until January 2, 2020. 3. Goods held on consignment from Claudia Kishi Company were included in Brown's December 31, 2019, physical count of inventory at $13,130. 4. Freight-in of $3,200 was debited to advertising expense on December 28, 2019. Compute the current ratio based on Brown's balance sheet. (Round ratio to 2 decimal places, e.g. 2.31:1.) The current ratio Recompute the current ratio after corrections are made. (Round ratio to 2 decimal places, e.g. 2.31:1.) The current ratio By what amount will income (before taxes) be adjusted up or down as a result of the corrections? Assume that goods are sold

Answer 1

Answer:

current ratio before adjustments = 1.81

current ratio after adjustments = 1.87

income should increase by $3,200

Explanation:

1. Goods purchased costing $21,860 were shipped f.o.b. shipping point by a supplier on December 28. Brown received and recorded the invoice on December 29, 2019, but the goods were not included in Brown's physical count of inventory because they were not received until January 4, 2020. GOODS SHOULD BE INCLUDED IN INVENTORY, INCREASING TOTAL ASSETS BY $21,860.

3. Goods held on consignment from Claudia Kishi Company were included in Brown's December 31, 2019, physical count of inventory at $13,130. GOODS SHOULD HAVE NOT BEEN INCLUDED IN INVENTORY, DECREASING TOTAL ASSETS BY $13,130

4. Freight-in of $3,200 was debited to advertising expense on December 28, 2019. SHOULD HAVE INCREASED THE INVENTORY ACCOUNT AND SHOULD HAVE NOT BEEN CONSIDERED AN EXPENSE. ASSETS SHOULD INCREASE BY $3,200.

total assets = $384,510 + $21,960 - $13,130 + $3,200 = $396,540

liabilities did not change = $212,400

income should increase by $3,200 which is the freight cost, not an expense.

current ratio before adjustments = $384,510 / $212,400 = 1.81

current ratio after adjustments = $396,540 / $212,400 = 1.87

income should increase by $3,200