The records of Pelletier Inc. show the following data for the years ended July 31:Income statement:SalesCost of goods soldOperating expensesStatement of financial position:Inventory20182017$320,000 $312,000187,000 203,00052,000 52,00037,000 24,0002016$300,000170,00050,00037,000After the company's July 31, 2018, year-end, the controller discovers two errors:1. Ending inventory at the end of 2016 was actually $27,000, not $37,000. Pelletier includedgoods held on consignment for another company that were mistakenly included in the 2016inventory account. As a result, the company's inventory count showed the company havingmore inventory than its accounting records indicated it should have. The company adjustedits inventory and cost of goods sold accordingly.2. Pelletier purchased $5,000 of goods from a supplier on July 30, 2017, with shipping termsFOB shipping point. Pelletier did not receive the goods until August 4, 2017 at which timethe company recorded the purchase.Instructions(a) For each of the three years, prepare both the incorrect and corrected income statements throughto income before income tax.(b) What is the combined (total) impact of the errors on retained earnings (ignoring any incometax effects) for the three years before correction? After correction?(c) Calculate both the incorrect and corrected inventory turnover ratios for each of 2018 and 2017.

Answered: The records of Pelletier Inc. show the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

The records of Pelletier Inc. show the following data for the years ended July 31:
Income statement:
Sales
Cost of goods sold
Operating expenses
Statement of financial position:
Inventory
2018
2017
$320,000 $312,000
187,000 203,000
52,000 52,000
37,000 24,000
2016
$300,000
170,000
50,000
37,000
After the company's July 31, 2018, year-end, the controller discovers two errors:
1. Ending inventory at the end of 2016 was actually $27,000, not $37,000. Pelletier included
goods held on consignment for another company that were mistakenly included in the 2016
inventory account. As a result, the company's inventory count showed the company having
more inventory than its accounting records indicated it should have. The company adjusted
its inventory and cost of goods sold accordingly.
2. Pelletier purchased $5,000 of goods from a supplier on July 30, 2017, with shipping terms
FOB shipping point. Pelletier did not receive the goods until August 4, 2017 at which time
the company recorded the purchase.
Instructions
(a) For each of the three years, prepare both the incorrect and corrected income statements through
to income before income tax.
(b) What is the combined (total) impact of the errors on retained earnings (ignoring any income
tax effects) for the three years before correction? After correction?
(c) Calculate both the incorrect and corrected inventory turnover ratios for each of 2018 and 2017.

Expert Solution

Step 1

Rectification of error - Sometimes few transaction is being recorded incorrectly hence to present true and fair view of the financial statement it is important to rectify all those error.

Overstatement of Ending Inventory

As we can see that we have overstated the closing inventory in 2016 by 10000 (37000-27000) hence by reason of this income is overstated by the same amount and as a result closing inventory is also overstated by 10000.

but we have also seen that we inventory was overstated by 10000 which become the opening stock in 2017 and as a result of year 2016 income was overstated and 2017 year income was understated because opening inventory is treated as an expense in income statement

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