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Q. 8-26E

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Intermediate Accounting (Kieso)
Found in: Page 430

Short Answer

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

Instructions

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.

See the step by step solution

Step by Step Solution

Ending inventory effect on net income

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.

Adjusted net income for each of the 6 years

Year

Net Income as per book

Error in ending inventory

Adjusted net income

2012

$50,000

Overstated by $3,000

$50,000-$3,000 = $47,000

2013

$52,000

Overstated by $9,000

$52,000-$9,000+$3,000 = $46,000

2014

$54,000

Understated by $11,000

$54,000 +$11,000 + $9,000 = $74,000

2015

$56,000

No error

$56,000 - $11,000 = $45,000

2016

$58,000

Understated by $2,000

$58,000+$2,000 = $60,000

2017

$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.

Most popular questions for Business-studies Textbooks

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.”

Instructions

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.

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