Yellowstone River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies

Yellowstone River Supply Co. sells canoes, kayaks, whitewater rafts, and other boating supplies. During the taking of its physical inventory on December 31, 2014, Yellowstone River Supply incorrectly counted its inventory as $324,650 instead of the correct amount of $338,500.

a. State the effect of the error on the December 31, 2014, balance sheet of Yellowstone River Supply.

b. State the effect of the error on the income statement of Yellowstone River Supply for the year ended December 31, 2014.

c. If uncorrected, what would be the effect of the error on the 2015 income statement?

d. If uncorrected, what would be the effect of the error on the December 31, 2015,
balance sheet?

Answer:


a. Balance Sheet
Merchandise inventory*………………………………………… $13,850 understated
Current assets…………………………………………………… $13,850 understated
Total assets……………………………………………………… $13,850 understated
Owner’s equity………………………………………………… $13,850 understated
* $13,850 = $338,500 – $324,650
b. Income Statement
Cost of merchandise sold……………………………………… $13,850 overstated
Gross profit……………………………………………………… $13,850 understated
Net income……………………………………………………… $13,850 understated
c. Income Statement
Cost of merchandise sold……………………………………… $13,850 understated
Gross profit……………………………………………………… $13,850 overstated
Net income……………………………………………………… $13,850 overstated
d. The December 31, 2015, balance sheet would be correct, since the 2014
inventory error reverses itself in 2015.