EX 7-18 Effect of errors in physical inventory

Kickstand Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 2014, Kickstand Motorcycle Shop incorrectly counted its inventory as $640,500 instead of the correct amount of $618,900.

a. State the effect of the error on the December 31, 2014, balance sheet of Kickstand Motorcycle Shop.

b. State the effect of the error on the income statement of Kickstand Motorcycle Shop for the year ended December 31, 2014.

c. If uncorrected, what would be the effect of the error on the 2015 income statement?

d. If uncorrected, what would be the effect of the error on the December 31, 2015, balance sheet?

Answer:



a. Balance Sheet
Merchandise inventory*………………………………………… $21,600 overstated
Current assets…………………………………………………… $21,600 overstated
Total assets……………………………………………………… $21,600 overstated
Owner’s equity………………………………………………… $21,600 overstated
* $21,600 = $640,500 – $618,900
b. Income Statement
Cost of merchandise sold……………………………………… $21,600 understated
Gross profit……………………………………………………… $21,600 overstated
Net income……………………………………………………… $21,600 overstated
c. Income Statement
Cost of merchandise sold……………………………………… $21,600 overstated
Gross profit……………………………………………………… $21,600 understated
Net income……………………………………………………… $21,600 understated
d. The December 31, 2015, balance sheet would be correct, since the 2014
inventory error reverses itself in 2015.