Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2,

Missouri River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 20Y2, Missouri River Supply incorrectly counted its inventory as $233,400 instead of the correct amount of $238,600.

a. State the effect of the error on the December 31, 20Y2, balance sheet of Missouri River Supply.

b. State the effect of the error on the income statement of Missouri River Supply for the year ended December 31, 20Y2.

c. If uncorrected, what would be the effect of the error on the 20Y3 income statement?

d. If uncorrected, what would be the effect of the error on the December 31, 20Y3, balance sheet?

Answer:

a.

Merchandise inventory*................................................ $5,200 understated

Current assets............................................................ $5,200 understated

Total assets............................................................... $5,200 understated

Owner’s equity............................................................ $5,200 understated

* $5,200 = $238,600 – $233,400

b.

Cost of merchandise sold............................................. $5,200 overstated

Gross profit............................................................... $5,200 understated

Net income.................................................................. $5,200 understated

c.

Cost of merchandise sold............................................. $5,200 understated

Gross profit............................................................... $5,200 overstated

Net income.................................................................. $5,200 overstated

d. The December 31, 20Y3, balance sheet would be correct, since the 20Y2

inventory error reverses itself in 20Y3.