Question: Effect of Errors in Physical Inventory
Fonda Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 2016, Fonda Motorcycle Shop incorrectly counted its inventory as $337,500 instead of the correct amount of $328,850.
Enter all amounts as positive numbers.
a. State the effect of the error on the December 31, 2016, balance sheet of Fonda Motorcycle Shop.
| Balance Sheet Items |
Understated / Overstated |
Amount |
| Merchandise Inventory |
Overstated |
$ |
| Current Assets |
Overstated |
$ |
| Total Assets |
Overstated |
$ |
| Owner's Equity |
Overstated |
$ |
b. State the effect of the error on the income statement of Fonda Motorcycle Shop for the year ended December 31, 2016.
| Income Statement Items |
Understated / Overstated |
Amount |
| Cost of Merchandise Sold |
Understated |
$ |
| Gross Profit |
Overstated |
$ |
| Net Income |
Overstated |
$ |
c. If uncorrected, what would be the effect of the error on the 2017 income statement?
| Income Statement Items |
Understated / Overstated |
Amount |
| Cost of Merchandise Sold |
Overstated |
$ |
| Gross Profit |
Understated |
$ |
| Net Income |
Understated |
$ |