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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

What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.

Jan. 1 Inventory 100 units at \(5 each

4 Sale 80 units at \)8 each

11 Purchase 150 units at \(6 each

13 Sale 120 units at \)8.75 each

20 Purchase 160 units at \(7 each

27 Sale 100 units at \)9 each

Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions

(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end-of-month closingentry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.

(b) Compute gross profit using the periodic system.

(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.

(d) Compute gross profit using the perpetual system.

What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?

Clay Mattews, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Clay understands the more sophisticated computer inventory control systems, he has littleknowledge of how inventory cost is determined. In studying the records of Strider Enterprises, which sells normal brand-namegoods from its own store and on consignment through Chavez Inc., he asks you to answer the following questions.

Instructions

(a) Should Strider Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yetreceived if the terms of purchase are f.o.b. shipping point (manufacturer’s plant)? Why?

(b) Should Strider Enterprises include freight-in expenditures as an inventory cost? Why?

(c) If Strider Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?

(d) What are products on consignment? How should they be reported in the financial statements?

Arruza Co. is considering switching from the specific-goods LIFO approach to the dollar-value LIFO approach. Because the financial personnel at Arruza know very little about dollar-value LIFO, they ask youto answer the following questions.

(a) What is a LIFO pool?

(b) Is it possible to use a LIFO pool concept and not use dollar-value LIFO? Explain.

(c) What is a LIFO liquidation?

(d) How are price indexes used in the dollar-value LIFO method?

(e) What are the advantages of dollar-value LIFO over specific-goods LIFO?
See all solutions

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