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Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y1, Fonda incorrectly counted its inventory as $452,500 instead of the correct amount of $425,500. a. State the effects of the error on the December 31, 20Y1, balance sheet of Fonda Motorcycle Shop. b. State the effects of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y1. c. If uncorrected, what would be the effects of the error on the 20Y2 income statement? d. If uncorrected, what would be the effects of the error on the December 31, 20Y2, balance sheet?
Financial And Managerial Accounting
Solutions
Financial And Managerial Accounting
Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y1, Fonda incorrectly counted its inventory as $452,500 instead of the correct amount of $425,500.
- a. State the effects of the error on the December 31, 20Y1, balance sheet of Fonda Motorcycle Shop.
- b. State the effects of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y1.
- c. If uncorrected, what would be the effects of the error on the 20Y2 income statement?
- d. If uncorrected, what would be the effects of the error on the December 31, 20Y2, balance sheet?
(a)
Indicate the effect of misstatement on FM shop in their balance sheet.
Explanation of Solution
Inventory error:
Inventory errors are sometimes caused by making mistake, in physical count, in pricing the inventory correctly, or in recognizing the transfer of title for the goods in transit. These inventory errors affect both the income statement as well as the balance sheet.
Indicate the effect of misstatement on FM shop in their balance sheet.
| Particulars | Amount of MisstatementOverstatement (Understatement) |
| Balance sheet: (20Y1) | |
| Merchandise Inventory (overstated) (1) | $(27,000) |
| Current assets (overstated) | $(27,000) |
| Total assets (overstated) | $(27,000) |
| Owner’s equity (overstated) | $(27,000) |
Table (1)
The inventory at the year-end is overstated...
(b)
Indicate the effect of misstatement on FM shop in their income statement.
(c)
Indicate the effect on FM shop in their income statement on the next year if the mistake is uncorrected.
(d)
Indicate the effect on FM shop in their balance sheet on the next year if the mistake is uncorrected.
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