You have been hired as the new controller for the Ralston Company. Shortly after

Question

You have been hired as the new controller for the Ralston Company. Shortly after joining the company in 2018, you discover the following errors related to the 2016 and 2017 financial statements:

Inventory at 12/31/2016 was understated by $7,300.

Inventory at 12/31/2017 was overstated by $11,600.

On 12/31/2017, inventory was purchased for $4,300. The company did not record the purchase until the inventory was paid for early in 2018. At that time, the purchase was recorded by a debit to purchases and a credit to cash.

The company uses a periodic inventory system.

Required:
1. Assuming that the errors were discovered after the 2017 financial statements were issued, analyze the effect of the errors on 2017 and 2016 cost of goods sold, net income, and retained earnings. (Ignore income taxes.)
2. Prepare a journal entry to correct the errors.

Required 2

record journal entry to correct erros

2016       2017 Beginning Inventory Beginning Inventory Plus:Net purchases Plus:Net purchases Less: Ending inventory Less: Ending inventory Cost of goods sold Cost of goods sold Revenues Less: Cost of goods sold Less: Cost of goods sold Less:other expenses Less:other expenses Net income Net income Retained earnings Retained earnings

Explanation / Answer

Effect of the errors in 2016 & 2017 Year Inventory COGS Net Income Reatined Earning 2016 Cl. Inventory understated by $ 7300 overstated by $ 7300 Understated by $ 7300 Understated by $ 7300 2017 Op. Inventory understated by $ 7300 understated by $ 7300 overstated by $ 7300 No effect because it has been earlier adjusted in 2016 2017 Cl. Inventory overstated by $ 11600 understated by $ 11600 overstated by $ 11600 overstated by $ 11600 Since Purchase of $ 4300 for the year 2017 has been added in the year 2018, hence puurchase for the year 2017 is also understated by $ 4300 2017 Purchase understated by $ 4300 understated by $ 4300 overstated by $ 4300 overstated by $ 4300 Journal Entry for errors in 2017 1 Retained Earning                       DR $                 11,600                     To Inventory $                       11,600 Being Cl. Inventory overstated has been rectified 2 Retained Earning                       DR $                   4,300                     To Purchase $                         4,300 Being purchase overstated has been rectified

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