Doubletree Company’s financial statements show the following. The
company recently discovered that in making physical counts of inventory, it had
made the following errors
P6-4A
Analysis of inventory errors
P6-4A
Doubletree Company’s financial statements show the
following. The company recently discovered that in making physical counts of
inventory, it had made the following errors: Inventory on December 31, 2010, is
understated by $50,000, and inventory on December 31, 2011, is overstated by
$20,000.
Required
1. For each key financial statement figure — (a), (b),
(c), and (d) above — prepare a table similar to the following to
show the adjustments necessary to correct the reported amounts.
|
For Year Ended December 31
|
2010
|
2011
|
2012
|
|
(a) Cost of goods sold . .
. . . . . . . . . . . . . .
|
$725,000
|
$955,000
|
$790,000
|
|
(b) Net income . . . . . .
. . . . . . . . . . . . . . . .
|
268,000
|
275,000
|
250,000
|
|
(c) Total current assets .
. . . . . . . . . . . . . . .
|
1,247,000
|
1,360,000
|
1,230,000
|
|
(d) Total equity . . . . .
. . . . . . . . . . . . . . . . .
|
1,387,000
|
1,580,000
|
1,245,000
|
Reported amount . . . . . . . . . . . . . . . . . . . . . .
Adjustments for: 12/31/2010 error . . . . . . . . .
12/31/2011 error . . . . . . . .
Corrected amount . . . . . . . . . . . . . . . . . . . . .
Analysis Component
2.
What is the error in total net income for the combined three-year period
resulting from the inventory errors? Explain.
3.
Explain why the understatement of inventory by $50,000 at the end of 2010
results in an understatement of equity by the same amount in that year.
Check
(1) Corrected net income: 2010, $318,000; 2011, $205,000; 2012, $270,000
TUTORIAL
PREVIEW
|
DOUBLETREE COMPANY
Adjustments to Correct
Inventory Errors
|
|
|||
|
(a)
|
|
|
|
|
|
Cost of goods
sold:
|
2010
|
2011
|
2011
|
|
|
Reported amount
|
$ 725,000
|
$
955,000
|
$
790,000
|
|
|
Adjustments for 12/31/2010 error
|
(50,000)
|
50,000
|
|
|
|
12/31/2011 error
|
|
20,000
|
(20,000)
|
|
|
Corrected
|
$
675,000
|
$
1,025,000
|
$
770,000
|
|
|
|
Correct!
|
Correct!
|
Correct!
|
|
