Part I Garrett Co. recorded goods in transit purchased f.o.b. shipping point at

Question

Part I

Garrett Co. recorded goods in transit purchased f.o.b. shipping point at year-end as purchases. The good were excluded from ending inventory. What effect does this omission have on Garrett’s assets and net income at year end?

Multiple Choice

A. Assets are not affected and net income is understated.

B. Assets are understated and net income is understated.

C. Assets are understated and net income is not affected.

D. Assets are not affected and net income is overstated.

Part II

Maker Co. discovered that in the prior year it incorrectly calculated depreciation expense and reported $75,000 in depreciation expense instead of the correct depreciation expense of $50,000. The tax rate for the current year was 35%. What was the impact of the error on Maker’s financial statements for the prior period?

Multiple Choice

A.Overstatement of net income of $16,250.

B. Understatement of depreciation expense of $25,000.

C. Understatement of accumulated depreciation of $25,000.

D. Overstatement of accumulated depreciation of $25,000.

Explanation / Answer

Answer:-I)- The effect of this omission have on Garrett’s assets and net income at year end will:- Assets are understated and net income is understated (Option-B).

Explanation:- Since the goods were purchased under the terms fob shipping point, they became the property of the buyer when shipped and should have been included in ending inventory. Since they were not, inventory, a current asset, is understated. Since the purchase was recorded, however, beginning inventory and purchases are fairly stated meaning cost of goods available is fairly stated. An understatement of ending inventory causes an over statement of cost of goods sold and an understatement of income

II)-The impact was of the error on Maker’s financial statements for the prior period:- Overstatement of accumulated depreciation of $25,000 (Option:-D).

Explanation:-The accumulated amount of depreciation will increase by $25000 and vale of assets will decrease by $25000.

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