Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8

Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 20Y8, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.

a. State the effect of the error on the December 31, 20Y8, balance sheet of Fonda Motorcycle Shop.

b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 20Y8.

c. If uncorrected, what would be the effect of the error on the 20Y9 income statement?

d. If uncorrected, what would be the effect of the error on the December 31, 20Y9, balance sheet?

Answer:

a.

Merchandise inventory*................................................ $8,650 overstated

Current assets............................................................ $8,650 overstated

Total assets............................................................... $8,650 overstated

Owner’s equity............................................................ $8,650 overstated

* $8,650 = $337,500 – $328,850

b.

Cost of merchandise sold............................................. $8,650 understated

Gross profit............................................................... $8,650 overstated

Net income.................................................................. $8,650 overstated

c.

Cost of merchandise sold............................................. $8,650 overstated

Gross profit............................................................... $8,650 understated

Net income.................................................................. $8,650 understated

d. The December 31, 20Y9, balance sheet would be correct, since the 20Y8

inventory error reverses itself in 20Y9.