Chapter 6, Problem 6BPSB

Requirement 1

To determine

Tocalculate:

Corrected figures from (a) to (d).

Answer to Problem 6BPSB

Solution:

(a).

Cost of Goods Sold	2014	2015	2016
Reported amount	$207200	$213800	$197030
Adjustment for; 12/31/2014 error	$18000	- $18000	$0
12/31/2015 error	$0	- $26000	$26000
Corrected amount	$225200	$169800	$223030

(b).

Net income	2014	2015	2016
Reported amount	$175800	$212270	$184910
Adjustment for; 12/31/2014 error	- $18000	$18000	$0
12/31/2015 error	$0	$26000	- $26000
Corrected amount	$157800	$256270	$158910

(c).

Total current assets	2014	2015	2016
Reported amount	$276000	$277500	$272950
Adjustment for; 12/31/2014 error	- $18000	$0	$0
12/31/2015 error	$0	$26000	$0
Corrected amount	$258000	$303500	$272950

(d).

Total Equity	2014	2015	2016
Reported amount	$314000	$315000	$346000
Adjustment for; 12/31/2014 error	- $18000	$0	$0
12/31/2015 error	$0	$26000	$0
Corrected amount	$296000	$341000	$346000

Explanation of Solution

(a).

Cost of Goods Sold	2014	2015	2016
Reported amount	$207200	$213800	$197030
Adjustment for; 12/31/2014 error	$18000	- $18000	$0
12/31/2015 error	$0	- $26000	$26000
Corrected amount	$225200	$169800	$223030

As we know when ending inventory is overstated then it will show cost of goods sold at lower value. So for knowing correct amount of cost of goods sold in the year we will have to add $18000to the incorrect amount of cost of goods sold.

In year 2015, $18000 will be deducted because ending inventory of previous year will be beginning inventory for this year. So overstatement of beginning inventory must be deducted for knowing correct amount of cost of goods sold. Apart from this understatement of ending inventory by $26000 should be deducted from incorrect amount of cost of goods sold.

In year 2016, $26000 will be added because ending inventory of previous year will be beginning inventory for this year. So understatement of beginning inventory must be added for knowing correct amount of cost of goods sold.

(b).

Net income	2014	2015	2016
Reported amount	$175800	$212270	$184910
Adjustment for; 12/31/2014 error	- $18000	$18000	$0
12/31/2015 error	$0	$26000	- $26000
Corrected amount	$157800	$256270	$158910

As we know when ending inventory is overstated then it will show net income at higher value. So for knowing correct amount of net income in the year we will have to deduct $18000from the incorrect amount of net income.

In year 2015, $18000 will be added because ending inventory of previous year will be beginning inventory for this year. So overstatement of beginning inventory must be added to the incorrect value of net income for knowing correct amount of net income. Apart from this understatement of ending inventory by $26000 should be added to the incorrect amount of net income because understatement of ending inventory leads to lower amount of net income.

In year 2016, $26000 will be deducted because ending inventory of previous year will be beginning inventory for this year. So understatement of beginning inventory leads to higher amount of net income that is why for knowing correct amount of net income we must deduct $26000from the incorrect amount of net income.

(c).

Total current assets	2014	2015	2016
Reported amount	$276000	$277500	$272950
Adjustment for; 12/31/2014 error	- $18000	$0	$0
12/31/2015 error	$0	$26000	$0
Corrected amount	$258000	$303500	$272950

As we know that ending inventory is the part of current assets, so overstatement of ending inventory by $18000 will lead to higher value of current assets that is why we need to deduct $18000from the incorrect amount of current assets.

In year 2015, $18000 will not be considered because ending inventory of previous year becomes beginning inventory of next year and beginning inventory is not part of current assets that is why $18000 will not be considered in the year 2016. Apart from this understatement of ending inventory by $26000 will be added to the incorrect amount of current assets.

In year 2016, $26000 will not be considered because ending inventory of previous year becomes beginning inventory of next year and beginning inventory is not part of current assets that is why $26000 will not be considered in the year 2016.

(d).

Total Equity	2014	2015	2016
Reported amount	$314000	$315000	$346000
Adjustment for; 12/31/2014 error	- $18000	$0	$0
12/31/2015 error	$0	$26000	$0
Corrected amount	$296000	$341000	$346000

As we know that net income is the part of total equity. Overstatement ** understatement of ending inventory affects net income, so for knowing correct amount of equity we will have to consider impact of errors in the inventory.

In the year 2014, $18000 will be deducted from the incorrect amount of total equity because overstated ending inventory will increase value of total equity that is why for reaching to correct amount of total equity we need to deduct $18000 from the incorrect amount of total equity.

In the year 2015, $26000 will be added to the incorrect amount of total equity because understated ending inventory will decrease value of total equity that is why for reaching to correct amount of total equity we need to add $26000to the incorrect amount of total equity.

In year 2016, there will be no such adjustment because ending inventory of this year does not have such errors.

Conclusion

Thus, above calculated amounts are the correct figures of cost of goods sold, net income, total current assets and total equity after making required adjustments for errors in the inventory.

Requirement 2;

To determine

To calculate:

Error in total net income for the combined three-year period

Answer to Problem 6BPSB

Solution:

Error in total net income for the combined three-year period = $0

Explanation of Solution

  $\begin{array}{l}\text{First of all let’s calculate total net income before adjustments for three-year period;}\\ \text{Total net income for three-year period (\$175800 + \$212270 + \$184910) = \$572980}\\ \text{Corrected net income for three-year period (\$157800 + \$256270 + \$158910) = \$572980}\\ \text{Thus error in total net income (\$572980 - \$572980) = \$0}\\ \text{So, it is clear that total net income before errors and after correcting errors is same }\\ \text{that is why there is no error in total net income}\text{.}\end{array}$

Conclusion

Thus, above calculation shows that there is no error in total net income for the combined three-year period.

Requirement 3;

To determine

To analysis:

Effect of the overstatement of inventory on equity.

Answer to Problem 6BPSB

Solution:

Yes, overstatement of inventory by $18000 at the end of 2014 will result into overstatement of equity by $18000 because overstatement of ending inventory will result into overstatement of net income.

Explanation of Solution

Yes, overstatement of inventory by $18000 at the end of 2014 will result into overstatement of equity by the same amount in that year because overstatement of ending inventory will result into lower cost of goods sales and as a result net income will also be overstated by same amount.

We know that net income is the part of equity and if net income is overstated then equity will also be overstated by same amount in that year.

Conclusion

Thus, above given solution shows the impact of overstatement of inventory on total equity. This shows that overstatement of inventory will result into overstatement of total equity by same amount of $18000.