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, 2016, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.
Enter all amounts as positive numbers.
a. State the effect of the error on the December 31, 2016, balance sheet of Fonda Motorcycle Shop.
Balance Sheet Items Understated / Overstated Amount Merchandise Inventory Overstated $ Current Assets Overstated $ Total Assets Overstated $ Owner's Equity Overstated $
b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 2016.
Income Statement Items Understated / Overstated Amount Cost of Merchandise Sold Understated $ Gross Profit Overstated $ Net Income Overstated $
c. If uncorrected, what would be the effect of the error on the 2017 income statement?
Income Statement Items Understated / Overstated Amount Cost of Merchandise Sold Overstated $ Gross Profit Understated $ Net Income Understated $
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, 2016, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.
Enter all amounts as positive numbers.
a. State the effect of the error on the December 31, 2016, balance sheet of Fonda Motorcycle Shop.
| Balance Sheet Items | Understated / Overstated | Amount |
| Merchandise Inventory | Overstated | $ |
| Current Assets | Overstated | $ |
| Total Assets | Overstated | $ |
| Owner's Equity | Overstated | $ |
b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 2016.
| Income Statement Items | Understated / Overstated | Amount |
| Cost of Merchandise Sold | Understated | $ |
| Gross Profit | Overstated | $ |
| Net Income | Overstated | $ |
c. If uncorrected, what would be the effect of the error on the 2017 income statement?
| Income Statement Items | Understated / Overstated | Amount |
| Cost of Merchandise Sold | Overstated | $ |
| Gross Profit | Understated | $ |
| Net Income | Understated | $ |
Related questions
Bonita Company is in the process of adjusting and correcting itsbooks at the end of 2017. In reviewing its records, the followinginformation is compiled.
| 1. | Bonita has failed to accrue sales commissions payable at theend of each of the last 2 years, as follows. |
| December 31, 2016 | $3,300 | |
| December 31, 2017 | $2,300 |
| 2. | In reviewing the December 31, 2017, inventory, Bonitadiscovered errors in its inventory-taking procedures that havecaused inventories for the last 3 years to be incorrect, asfollows. |
| December 31, 2015 | Understated | $16,700 | ||
| December 31, 2016 | Understated | $19,000 | ||
| December 31, 2017 | Overstated | $6,000 |
Bonita has already made an entry that established the incorrectDecember 31, 2017, inventory amount.
| 3. | At December 31, 2017, Bonita decided to change the depreciationmethod on its office equipment from double-declining-balance tostraight-line. The equipment had an original cost of $90,000 whenpurchased on January 1, 2015. It has a 10-year useful life and nosalvage value. Depreciation expense recorded prior to 2017 underthe double-declining-balance method was $39,600. Bonita has alreadyrecorded 2017 depreciation expense of $11,600 using thedouble-declining-balance method. | |
| 4. | Before 2017, Bonita accounted for its income from long-termconstruction contracts on the completed-contract basis. Early in2017, Bonita changed to the percentage-of-completion basis foraccounting purposes. It continues to use the completed-contractmethod for tax purposes. Income for 2017 has been recorded usingthe percentage-of-completion method. The following information isavailable. |
Pretax Income | ||||
Percentage-of-Completion | Completed-Contract | |||
| Prior to 2017 | $141,700 | $94,900 | ||
| 2017 | 57,500 | 21,600 | ||
Prepare the journal entries necessary at December 31, 2017, torecord the above corrections and changes. The books are still openfor 2017. The income tax rate is 40%. Bonita has not yet recordedits 2017 income tax expense and payable amounts so current-year taxeffects may be ignored. Prior-year tax effects must be consideredin item 4. (Credit account titles are automaticallyindented when amount is entered. Do not indent manually. If noentry is required, select "No Entry" for the account titles andenter 0 for the amounts.)
QUESTION 6
Which of the following statements is not true regarding prepaidexpenses?
Prepaid expenses represent assets. | ||
Prepaid expenses are shown in a special section of the incomestatement. | ||
Prepaid expenses become expenses only as goods or services areused up. | ||
Prepaid expenses appear in the balance sheet. |
4 points
QUESTION 7
The balance of an unearned revenue account:
Appears in the balance sheet as a component of stockholders'equity. | ||
Appears in the income statement along with other revenueaccounts. | ||
Appears in a separate section of the income statement forrevenue not yet earned. | ||
Appears in the liability section of the balance sheet. |
4 points
QUESTION 8
As of January 31, Hudson Corporation owes $600 to U-Rent-It forequipment used during January. If no adjustment is made for thisitem at January 31, how will Hudson's financial statements beaffected?
Cash will be overstated at January 31. | ||
Net income for January will be overstated. | ||
Stockholders' equity will be understated. | ||
The financial statements will be accurate since the $600 doesnot have to be paid yet. |
4 points
QUESTION 9
The accountant for the Linville Company forgot to make anadjusting entry to record revenue earned but not yet billed tocustomers. The effect of this error is:
An overstatement of assets. | ||
An overstatement of stockholders' equity. | ||
Understatement of both assets and stockholders' equity | ||
Overstatement of both assets and stockholders' equity. |
4 points
QUESTION 10
An adjusting entry involving recognition of unrecorded revenueis necessary at the end of March in which of the followingsituations?
Financial Consultants received payment in February forconsulting services rendered in March. | ||
Financial Consultants began working for a client on March 15;bills will be sent monthly beginning April 15. | ||
Financial Consultants made payment in January for office rentfor the first three months of the year. | ||
On March 31, a major customer paid his bill for a consulting jobcompleted in February. |
4 points
QUESTION 11
Which of the following entries causes an immediate decrease inassets and in stockholders' equity?
The entry to record depreciation expense. | ||
The entry to record revenue earned but not yet received. | ||
The entry to record the earned portion of rent received inadvance. | ||
The entry to record accrued wages payable. |
4 points
QUESTION 12
The CPA firm auditing Greer Company found that net income hadbeen overstated. Which of the following errors could be thecause?
Failure to record depreciation expense for the period. | ||
No entry made to record purchase of land for cash on the lastday of the year. | ||
Failure to record payment of an account payable on the last dayof the year. | ||
Failure to make an adjusting entry to record revenue which hadbeen earned but not yet billed to customers. |
