The Martin Company reported income before taxes of $370,000 for 2015 and ending inventory at December 31, 2015 of $170,000. Martin uses the periodic inventory system. A later audit produced the following information:
a) Merchandise costing $17,500 was shipped to Martin FOB shipping point on December 26, 2015. The purchase was not recorded in 2015 and the merchandise was excluded from the ending inventory because it was not received until January 4, 2016.
b) On December 28, 2015, merchandise costing $29,000 was sold to Deluxe Ltd. Deluxe had asked Martin to keep the merchandise until they could come and pick it up. Because the merchandise was still on the loading dock waiting for pick up at year-end, the merchandise was included in the inventory count. Martin has a mark-up on cost of 60%. No sale was recorded as of December 31st.
c) Martin sold merchandise to Sun Devil, Inc. on December 30, 2015 for a selling price of $50,000 and terms FOB Destination. Mark up on cost for this type of merchandise is 60%. Martin recorded the sale on December 30th when they placed the goods on the common carrier. The goods were excluded from the physical count at year-end because they were not in the warehouse. They were still in transit at December 31, 2015.
Determine the effect of these errors on Martin’s financial statements as of December 31, 2015. Use O for overstated, U for understated, or NE for No Effect.
1. Determine the overall effect on Assets as of December 31, 2015
2. Determine the overall effect on Liabilities as of December 31, 2015
3. Determine the overall effect on Stockholder's Equity as of December 31, 2015
4. Determine the correct ending inventory Martin Company should report on their year end balance sheet dated December 31, 2015. (*Martin was originally reporting ending inventory at $170,000.)
5. Determine the correct income before taxes as of December 31, 2015 (*Martin was originally reporting Income Before Taxes of $370,000)