In reviewing the accounts of Fisher Company in 2006 after the books for the prio
ID: 2380961 • Letter: I
Question
In reviewing the accounts of Fisher Company in 2006 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities:In 2004 the ending inventory was understated by $3,000. You also find that the company failed to accrue depreciation expense of $800 in 2004. You also find that an insurance premium of $7,200 was prepaid in 2004 covering the years 2004, 2005, and 2006. The prepayment was recorded with a debit to insurance expense.
REQUIRED: Ignoring taxes, determine what amount, if any, net income and retained earnings would be over or understated in 2004 and 2005 as a result of these errors. SHOW YOUR CALCULATIONS AND CLEARLY LABEL YOUR ANSWERS.
Explanation / Answer
In 2004: 1. Due to understatemnt of Ending Inv, COGS = Op Inv+ Purch-Enind Inv was high by 3000. Thus Sales - COGS = Gross profit was less by 3000. So Net Income was Less by 3000. AO after correction, Net Inc for 2004 will increase by 3000. 2. After recording Dep exp of 2004, net income shoud be less by 400. So After adj, net Inc for 2004 will be 3000-400 = 2600 3. Prepaid Insurance for 3yrs = 7300. So per year Prepaid Ins = 7200/3=2400. As this Insurance was expesed in 2004, Net incme was reduced by 7200 while it shold have been redued by 2400 only. So extra deduction of Insurane was 7200-2400=4800. So after Adj, Net income for 2004 will increase by 4800. So Net inc f0r 2004 = 2600+4800 = 7400 .....................Ans (a) in Year 2005, 1. Due to understatemnt of Opening Inv, COGS = Op Inv+ Purch-Enind Inv was Less by 3000. Thus Sales - COGS = Gross profit was High by 3000. So Net Income was High by 3000. AO after correction, Net Inc for 2005 will decrease by 3000. 2. Insurace exp for 2005 is 2400 which is not expensed. So after reording Insuranc expense fo 2400, net income will reduce by 2400. So After Adj, Net income for 2005 will reduce by 3000+2400 = 5400 .....Ans (b)
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