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Chapter 8: Q. 8-26E (page 430)

The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated.

Net Income Error in Ending

Year per Books Inventory

2012 \(50,000 Overstated \) 3,000

2013 52,000 Overstated 9,000

2014 54,000 Understated 11,000

2015 56,000 No error

2016 58,000 Understated 2,000

2017 60,000 Overstated 8,000

Instructions

Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventoryerrors.

Short Answer

Expert verified

The adjusted net income in the given year order are $47,000, $46,000, $74,000, $45,000, $60,000, and $50,000, respectively.

Step by step solution

01

Ending inventory effect on net income

Ending inventory has a positive relationship with the net income. Thus overstated inventory would have overstated net income, and understated inventory would have understated net income.

On the contrary, the opening inventory has negative relation with net income.

02

Adjusted net income for each of the 6 years

Year

Net Income as per book

Error in ending inventory

Adjusted net income

2012

$50,000

Overstated by $3,000

$50,000-$3,000 = $47,000

2013

$52,000

Overstated by $9,000

$52,000-$9,000+$3,000 = $46,000

2014

$54,000

Understated by $11,000

$54,000 +$11,000 + $9,000 = $74,000

2015

$56,000

No error

$56,000 - $11,000 = $45,000

2016

$58,000

Understated by $2,000

$58,000+$2,000 = $60,000

2017

$60,000

Overstated by $8,000

$60,000-$8,000-$2,000 = $50,000

Note: Net income has been adjusted for both beginning and ending inventory.

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Most popular questions from this chapter

Hull Company’s record of transactions concerning part X for the month of April was as follows.

Purchases Sales

April 1 (balance on hand) 100 @ $5.00 April 5 300

4 400 @ 5.10 12 200

11 300 @ 5.30 27 800

18 200 @ 5.35 28 150

26 600 @ 5.60

30 200 @ 5.80

Instructions

(a) Compute the inventory at April 30 on each of the following bases. Assume that perpetual inventory records are kept inunits only. Carry unit costs to the nearest cent.

(1) First-in, first-out (FIFO).

(2) Last-in, first-out (LIFO).

(3) Average cost.

(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, what amountwould be shown as ending inventory in (1), (2), and (3) above? (Carry average unit costs to four decimal places.)

Question: In January 2017, Susquehanna Inc. requested and secured permission from the commissioner of the Internal Revenue Service to compute inventories under the last-in, first-out (LIFO) method and elected to determine inventory cost under the dollar-value LIFO method. Susquehanna Inc. satisfied the commissioner that cost could be accurately determined by use of an index number computed from a representative sample selected from the company’s single inventory pool.

Instructions

(a) Why should inventories be included in (1) a balance sheet and (2) the computation of net income?

(b) The Internal Revenue Code allows some accountable events to be considered differently for income tax reporting purposes and financial accounting purposes, while other accountable events must be reported the same for both purposes. Discuss why it might be desirable to report some accountable events differently for financial accounting purposes than for income tax reporting purposes.

(c) Discuss the ways and conditions under which the FIFO and LIFO inventory costing methods produce different inventory valuations. Do not discuss procedures for computing inventory cost.

Assume that in an annual audit of Harlowe Inc. at December 31, 2017, you findthe following transactions near the closing date.

1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shippingroom on December 31, 2017. The customer was billed on that date and the machine excluded from inventory althoughit was shipped on January 4, 2018.

2. Merchandise costing \(2,800 was received on January 3, 2018, and the related purchase invoice recorded January 5. Theinvoice showed the shipment was made on December 29, 2017, f.o.b. destination.

3. A packing case containing a product costing \)3,400 was standing in the shipping room when the physical inventory wastaken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigationrevealed that the customer’s order was dated December 18, 2017, but that the case was shipped and the customer billedon January 10, 2018. The product was a stock item of your client.

4. Merchandise received on January 6, 2018, costing \(680 was entered in the purchase journal on January 7, 2018. The invoiceshowed shipment was made f.o.b. supplier’s warehouse on December 31, 2017. Because it was not on hand at December31, it was not included in inventory.

5. Merchandise costing \)720 was received on December 28, 2017, and the invoice was not recorded. You located it in thehands of the purchasing agent; it was marked “on consignment.”

Instructions

Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, andgive your reason for your decision on each item.

The following is a record of Pervis Ellison Company’s transactions for Boston Teapots for the month of May 2017.

May 1 Balance 400 units @ \(20 May 10 Sale 300 units @ \)38

12 Purchase 600 units @ \(25 20 Sale 540 units @ \)38

28 Purchase 400 units @ $30

Instructions

(a) Assuming that perpetual inventories are not maintained and that a physical count at the end of the month shows 560units on hand, what is the cost of the ending inventory using (1) FIFO and (2) LIFO?

(b) Assuming that perpetual records are maintained and they tie into the general ledger, calculate the ending inventory using (1) FIFO and (2) LIFO.

Dimitri Company, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2017.

Inventory at December 31, 2017 (based on physical count of goods in Dimitri’s plant, at cost, on December 31, 2017) \(1,520,000

Accounts payable at December 31, 2017 1,200,000

Net sales (sales less sales returns) 8,150,000

Additional information is as follows.

1. Included in the physical count were tools billed to a customer f.o.b. shipping point on December 31, 2017. These tools had a cost of \)31,000 and were billed at \(40,000. The shipment was on Dimitri’s loading dock waiting to be picked up by the common carrier.

2. Goods were in transit from a vendor to Dimitri on December 31, 2017. The invoice cost was \)76,000, and the goods were shipped f.o.b. shipping point on December 29, 2017.

3. Work in process inventory costing \(30,000 was sent to an outside processor for plating on December 30, 2017.

4. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2017, were not included in the physical count. On January 8, 2018, the tools costing \)32,000 were inspected and returned to inventory. Credit memos totaling \(47,000 were issued to the customers on the same date.

5. Tools shipped to a customer f.o.b. destination on December 26, 2017, were in transit at December 31, 2017, and had a cost of \)26,000. Upon notification of receipt by the customer on January 2, 2018, Dimitri issued a sales invoice for \(42,000.

6. Goods, with an invoice cost of \)27,000, received from a vendor at 5:00 p.m. on December 31, 2017, were recorded on a receiving report dated January 2, 2018. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2017.

7. Goods received from a vendor on December 26, 2017, were included in the physical count. However, the related \(56,000 vendor invoice was not included in accounts payable at December 31, 2017, because the accounts payable copy of the receiving report was lost.

8. On January 3, 2018, a monthly freight bill in the amount of \)8,000 was received. The bill specifically related to merchandise purchased in December 2017, one-half of which was still in the inventory at December 31, 2017. The freight charges were not included in either the inventory or in accounts payable at December 31, 2017.

Instructions

Using the format shown below, prepare a schedule of adjustments as of December 31, 2017, to the initial amounts per Dimitri’s accounting records. Show separately the effect, if any, of each of the eight transactions on the December 31, 2017, amounts. If the transactions would have no effect on the initial amount shown, enter NONE.

Accounts Net

Inventory Payable Sales

Initial amounts \(1,520,000 \)1,200,000 \(8,150,000

Adjustments—increase

(decrease)

1

2

3

4

5

6

7

8

Total adjustments

Adjusted amounts \) \( \)
See all solutions

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