The Effect of Inventory Errors
Response to the following problem:
You have been hired as the accountant for Christman Company, which uses the periodic inventory method. In reviewing the firm's records, you have noted what you think are several accounting errors made during the current year, 2009. These potential mistakes are listed as follows:
a. A $51,000 purchase of merchandise was properly recorded in the purchases account, but the related accounts payable account was credited for only $4,000.
b. A $4,400 shipment of merchandise received just before the end of the year was properly recorded in the purchases account but was not physically counted in the inventory and, hence, was excluded from the ending inventory balance.
c. A $5,600 purchase of merchandise was erroneously recorded as a $6,500 purchase.
d. A $1,200 purchase of merchandise was not recorded either as a purchase or as an account payable.
e. During the year, $3,100 of defective merchandise was sent back to a supplier. The original purchase had been recorded, but the merchandise return entry was not recorded.
f. During the physical inventory count, inventory that cost $800 was counted twice
Required:
1. If the previous accountant had tentatively computed the 2009 gross margin to be $25,000, what would be the correct gross margin for the year?
2. If these mistakes are not corrected, by how much will the 2010 net income be in error?