Clothing store Cloak and Dagger uses a periodic inventory system. The company\'s
ID: 2573934 • Letter: C
Question
Clothing store Cloak and Dagger uses a periodic inventory system. The company's ending inventory on December 31, 2019, its fiscal year end, based on a physical count, was determined to be $326,000. Cloak and Dagger's unadjusted trial balance also showed the following account balances: Purchases $620,000; Accounts payable $210,000; Accounts Receivable $225,000; Sales revenue $840,000.
1. Goods valued at $32,000 held on consignment from Threads count were inclulded in the physical count but not recorded as a purchase.
2. Purchases from Not too Shabby were incorrectly recorded at $41,000 instead of the correct amount of $14,000. The correct amount was included in the ending inventory.
3. Goods that cost $25,000 were shipped from a vendor on December 28, 2019, terms f.o.b. destination. The merchandise arrived on January 3,2020. The purchase and related accounts payable were recorded in 2019.
4. One inventory item was incorrectly included in ending inventory as 100 units, instead of the aorrect amount of 1,000 units. This item coast $40 per unit.
5. The 2018 balance sheet reported inventory of $352,000. The internal auditors discovered that a mathematical error caused this inventory to be understated by $62,000. This amount is considered to be material.
6. Goods shipped to a customer f.o.b. destination on December 25, 2019. were received by the customer on January 4,2020. The sales price was $40,000 and the merchandise cost $22,000. The sale and corresponding accounts receivable were recorded in 2019.
7. Goods shipped from a vendor f.o.b. shipping point on December 27, 2019, were received on January 3, 2020. The merchandise cost $18,000. The purchase was not recorded until 2020.
Required
1. Determine the correct amounts for 2019 ending inventory, purchases, accounts payable, sales revenue, and accounts receivable.
2. Calculate cost of goods sold for 2019.
3. Describe the steps Cloak and Dagger would undertake to correct the error in the 2018 ending inventory. What was the effect of the error on 2018 before tax income?
Explanation / Answer
1.
2.
Cost of goods sold
3.
Steps that Cloak and Dagger would undertake to correct the error in the 2018 ending inventory
a. The carrying amount of ending inventory will not be disturbed since ending inventory balance is calculated by physical count, hence this effect already nullified.
b. The cost of goods sold will be raised higher with this understatement of beginning inventory.
c. The effect of this prior period adjustment should be disclosed on each financial statement line item and its affect on per-share amounts, as well as the cumulative effect on the change in retained earnings.
The effect of the error on 2018 before tax income was understatement of income by $62000.
Inventory Purchases Accounts payable Accounts receivable Sales revenue Unadjusted balance on Dec 31, 2019 $326000 $620000 $210000 $225000 $840000 Adjustments: Good held on consignment -32000 Purchases incorrectly recorded -27000 -27000 Goods shipped by vendor FOB destination received after Dec 31, 2019 -25000 -25000 Inventory incorrectly recorded 400 Goods shipped to a customer FOB destination received after Dec 31, 2019 22000 -40000 -40000 Goods shipped by vendor FOB shipping point received before Dec 31, 2019 18000 18000 Adjusted balance $316400 $586000 $176000 $185000 $800000Related Questions
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