Chapter 8 Cost-based Inventories and Cost of Sales Required: 1. What is the revi
ID: 2392052 • Letter: C
Question
Chapter 8 Cost-based Inventories and Cost of Sales Required: 1. What is the revised 20X6 earnings after correction of these errors? ? ? A8-18 Inventory Errors: Internal auditors for Sandu Corp. discovered during 20X4 that finished goods inventory of $800,000 had been shipped to a customer on 30 December 20X3, the last working day of the year. The ending inventory for 31 December 20X3 had been properly stated on the basis of the year-end physical count. However, the sale was not recorded until 4 January 20X4, when sales revenue of $1,280,000 was recorded. Sandu uses a perpetual inventory system. When the accounting staff of Zhang Ltd. was preparing the first-quarter 20X5 interim financial state- ments, they discovered an error in the 31 December 20X4 financial statements. Inventory costing $530,000 had been in transit and was not received until 4 January 20X5. The accounts payable depart- ment had recorded the purchase as an account payable on 28 December 20X4. Title to the inventory had passed to Zhang on 27 December, the date that the supplier had loaded the shipment onto the shipping company's trucks. Zhang uses a periodic inventory method. Case A Case B Required: 1. 2. What impact did the errors have on each company's financial statements? What correcting entry should each company make when the error is discovered? A8-19 Gross Margin Method:Explanation / Answer
Case A Correct Accounting Entries for 2013: Entry # Debit Credit 1 Accounts Receivable $1,280,000 Sales $1,280,000 2 Cost of goods sold $800,000 Inventory $800,000 Entry #1 was not recorded in 2013. Entry #2 was correctly recorded in 2013 .So Physical inventory as on December 31 matched with books Sales was reduced in 2013 by $1280000 Net Income in 2013 had an impact of $1280000 ($1,280,000) Entry #2 to be made to reflect correct income Case B Since the company uses periodic inventory system, the following entry was made in 2014 Debit Credit Purchase $530,000 Accounts Payable $530,000 Since the title on the inventory was passed on December 27, this amount should have been included in closing inventoiry Under Periodic Inventory System , the cost of goods sold is calculated by following equation: Beginning Inventory +Purchase- Cost of goods sold= Ending Inventory Cost of Goods sold=Beginning inventory+Purchase-Ending Inventory Accounting Entries: Purchase Credit Beginning inventory Credit Cost of goods sold Debit Ending Inventory Debit Figure of Purchase and Beginning inventory of 2014 were accurate However, the ending inventory was less by $530000 Consequently Cost of goods sold was higher than required The impact was, reduction of net income by $530000 The cost of goods sold and ending inventory fugures need to be corrected, in order to reflect correct income