Effect of Errors in Physical InventoryFonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $157,760 instead of the correct amount of $151,450.Enter all amounts as positive numbers.a.  State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.Balance Sheet ItemsOverstated/UnderstatedAmountMerchandise Inventory $Current Assets  Total Assets  Owner's Equity  b.  State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.Income Statement ItemsOverstated/UnderstatedAmountCost of Merchandise Sold $Gross Profit  Net Income  c.  If uncorrected, what would be the effect of the error on the 20Y9 income statement?Income Statement ItemsUnderstated/OverstatedAmountCost of Merchandise Sold $Gross Profit  Net Income  d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

Question
Asked Nov 12, 2019
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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, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $157,760 instead of the correct amount of $151,450.

Enter all amounts as positive numbers.

a.  State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

Balance Sheet Items Overstated/Understated Amount
Merchandise Inventory   $
Current Assets    
Total Assets    
Owner's Equity    

b.  State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

Income Statement Items Overstated/Understated Amount
Cost of Merchandise Sold   $
Gross Profit    
Net Income    

c.  If uncorrected, what would be the effect of the error on the 20Y9 income statement?

Income Statement Items Understated/Overstated Amount
Cost of Merchandise Sold   $
Gross Profit    
Net Income    

d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

  1. The December 31, 20Y9, balance sheet would be correct, since the 20Y8 inventory error reverses itself in 20Y9.
  2. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error understates the inventory in 20Y9.
  3. The December 31, 20Y9, balance sheet would be incorrect, since the 20Y8 inventory error overstates the inventory in 20Y9.

 

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Expert Answer

Step 1

Calculate the overstated amount of inventory.

(Incorect amount of inventory -
Correct amount of inventory
Overstated amount
of inventory
=$157,760-$151, 450
=$6,310
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(Incorect amount of inventory - Correct amount of inventory Overstated amount of inventory =$157,760-$151, 450 =$6,310

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Step 2

a. State the effect of the error on the balance sheet at the end of the December 31, 20Y8.

In this case, the ending inventory is overstated by $6,310. The overstated amount of ending inventory increases the total assets of the company. At the same time, overstated ending inventory increases the net income by $6,310 and the increased net income increases the owner’s equity of the company.

Overstated
Amount
Particulars
in (S)
Understated
Merchandise inventory
Overstated
$6,310
Overstated
$6,310
Current assets
Total assets
Overstated
$6,310
Owner's equity
Overstated
$6,310
help_outline

Image Transcriptionclose

Overstated Amount Particulars in (S) Understated Merchandise inventory Overstated $6,310 Overstated $6,310 Current assets Total assets Overstated $6,310 Owner's equity Overstated $6,310

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Step 3

b. State the effect of the error on the income statement for the year ended December 31, 20Y8.

 Overstated ending inventory decreases the cost of m...

Overstated
Amount
Particulars
in (S)
Understated
Cost of merchandise sold
Gross profit
Understated
$6,310
Overstated
$6,310
Net income
Overstated
$6,310
help_outline

Image Transcriptionclose

Overstated Amount Particulars in (S) Understated Cost of merchandise sold Gross profit Understated $6,310 Overstated $6,310 Net income Overstated $6,310

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