The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated.
Net Income Error in Ending
Year per Books Inventory
2012 $50,000 Overstated $ 3,000
2013 52,000 Overstated 9,000
2014 54,000 Understated 11,000
2015 56,000 No error
2016 58,000 Understated 2,000
2017 60,000 Overstated 8,000
Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventoryerrors.
The adjusted net income in the given year order are $47,000, $46,000, $74,000, $45,000, $60,000, and $50,000, respectively.
Ending inventory has a positive relationship with the net income. Thus overstated inventory would have overstated net income, and understated inventory would have understated net income.
On the contrary, the opening inventory has negative relation with net income.
Net Income as per book
Error in ending inventory
Adjusted net income
Overstated by $3,000
$50,000-$3,000 = $47,000
Overstated by $9,000
$52,000-$9,000+$3,000 = $46,000
Understated by $11,000
$54,000 +$11,000 + $9,000 = $74,000
$56,000 - $11,000 = $45,000
Understated by $2,000
$58,000+$2,000 = $60,000
Overstated by $8,000
$60,000-$8,000-$2,000 = $50,000
Note: Net income has been adjusted for both beginning and ending inventory.
Zonker Inc. purchases 500 units of an item at an invoice cost of $30,000. What is the cost per unit? If the goods are shipped f.o.b. shipping point and the freight bill was$1,500, what is the cost per unit if Zonker Inc. pays the freight charges? If these items were bought on 2/10, n/30terms and the invoice and the freight bill were paid within the 10-day period, what would be the cost per unit?
Assume that in an annual audit of Harlowe Inc. at December 31, 2017, you findthe following transactions near the closing date.
1. A special machine, fabricated to order for a customer, was finished and specifically segregated in the back part of the shippingroom on December 31, 2017. The customer was billed on that date and the machine excluded from inventory althoughit was shipped on January 4, 2018.
2. Merchandise costing $2,800 was received on January 3, 2018, and the related purchase invoice recorded January 5. Theinvoice showed the shipment was made on December 29, 2017, f.o.b. destination.
3. A packing case containing a product costing $3,400 was standing in the shipping room when the physical inventory wastaken. It was not included in the inventory because it was marked “Hold for shipping instructions.” Your investigationrevealed that the customer’s order was dated December 18, 2017, but that the case was shipped and the customer billedon January 10, 2018. The product was a stock item of your client.
4. Merchandise received on January 6, 2018, costing $680 was entered in the purchase journal on January 7, 2018. The invoiceshowed shipment was made f.o.b. supplier’s warehouse on December 31, 2017. Because it was not on hand at December31, it was not included in inventory.
5. Merchandise costing $720 was received on December 28, 2017, and the invoice was not recorded. You located it in thehands of the purchasing agent; it was marked “on consignment.”
Assuming that each of the amounts is material, state whether the merchandise should be included in the client’s inventory, andgive your reason for your decision on each item.
Cruise Industries purchased $10,800 of merchandise on February 1, 2017,
subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $2,500 (gross price before trade or cash discount)on February 4. The invoice was paid on February 13.
(a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.
(b) Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.
(c) At what amount would the purchase on February 1 be recorded if the net method were used?
Clay Mattews, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Clay understands the more sophisticated computer inventory control systems, he has littleknowledge of how inventory cost is determined. In studying the records of Strider Enterprises, which sells normal brand-namegoods from its own store and on consignment through Chavez Inc., he asks you to answer the following questions.
(a) Should Strider Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yetreceived if the terms of purchase are f.o.b. shipping point (manufacturer’s plant)? Why?
(b) Should Strider Enterprises include freight-in expenditures as an inventory cost? Why?
(c) If Strider Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?
(d) What are products on consignment? How should they be reported in the financial statements?
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