Capwell Corporation uses a periodic inventory system. The company\'s ending inve

Question

Capwell Corporation uses a periodic inventory system. The company's ending inventory on December 31, 2013, its fiscal-year end, based on a physical count, was determined to be $343,000. Capwell's unadjusted trial balance also showed the following account balances: Purchases, $790,000; Accounts payable; $295,000; Accounts receivable, $310,000; Sales revenue, $970,000. The internal audit department discovered the following items:

1. Goods valued at $49,000 held on consignment from Dix Company were included in the physical count but not recorded as a purchase.

2. Purchases from Xavier Corporation were incorrectly recorded at $74,000 instead of the correct amount of $47,000. The correct amount was included in the ending inventory.

3. Goods that cost $42,000 were shipped from a vendor on December 28, 2013, terms f.o.b. destination. The merchandise arrived on January 3, 2014. The purchase and related accounts payable were recorded in 2013.

4. One inventory item was incorrectly included in ending inventory as 270 units, instead of the correct amount of 1,850 units. This item cost $40 per unit.

5. The 2012 balance sheet reported inventory of $522,000. The internal auditors discovered that a mathematical error caused this inventory to be understated by $79,000. This amount is considered to be material.

6. Goods shipped to a customer f.o.b. destination on December 25, 2013, were received by the customer on January 4, 2014. The sales price was $57,000 and the merchandise cost $30,500. The sale and corresponding accounts receivable were recorded in 2013.

7. Goods shipped from a vendor f.o.b. shipping point on December 27, 2013, were received on January 3, 2014. The merchandise cost $35,000. The purchase was not recorded until 2014.

Required: 1. Determine the correct amounts for 2013 ending inventory, purchases, accounts payable, sales revenue, and accounts receivable

2. Calculate cost of goods sold for 2013

3. What was the effect of the error in ending inventory on 2012 before-tax income?

Explanation / Answer

1) Inventory Purchases Accounts payable Accounts recivable Sales Revenue Unadjusted Balance 343000 790000 295000 310000 970000 Error 1 Goods held on consignement -49000 Error 2 Incorrect recording of purchases ( 74000 - 47000) -27000 Error 3 Incorrect recording of fob destination -42000 -42000 Error 4 Incorrect recording of inventory item ( 1850 - 270) * 40 63200 Error 5 Incorrect opening inventory 79000 Error 6 Incorrect recording of fob destination -57000 -57000 Error 7 Incorrect recording of fob shipping 35000 Correct Balances 436200 756000 253000 253000 913000 2) Cost of goods sold = opening inventory + Purchases - closing inventory                                        = ( 522000 + 79000) + 756000 - 436200                                        = 601000 + 756000 -436200                                        = 920800 3) If the ending inventory of 2012 is understated then the profits for that year is also understated This is because as the closing inventory is low , the cost of goods sold is high which in turns reduces the profits for the year

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