Capwell Corporation uses a periodic inventory system. The company's ending inventory on December 31, 2011, its fiscal-year end, based on a physical count, was determined to be $326,000. Capwell's unadjusted trial balance also showed the following account balances: Purchases, $620,000; Accounts payable; $210,000; Accounts receivable, $225,000; Sales revenue, $840,000.
The internal audit department discovered the following items:
1. Goods valued at $32,000 held on consignment from Dix Company were included in the physical count but not recorded as a purchase.
2. Purchases from Xavier Corporation were incorrectly recorded at $41,000 instead of the correct amount of $14,000. The correct amount was included in the ending inventory.
3. Goods that cost $25,000 were shipped from a vendor on December 28, 2011, terms f.o.b. destination. The merchandise arrived on January 3, 2012. The purchase and related accounts payable were recorded in 2011.
4. One inventory item was incorrectly included in ending inventory as 100 units, instead of the correct amount of 1,000 units. This item cost $40 per unit.
5. The 2010 balance sheet reported inventory of $352,000. The internal auditors discovered that a mathematical error caused this inventory to be understated by $62,000. This amount is considered to be material.
6. Goods shipped to a customer f.o.b. destination on December 25, 2011, were received by the customer on January 4, 2012. The sales price was $40,000 and the merchandise cost $22,000. The sale and corresponding accounts receivable were recorded in 2011.
7. Goods shipped from a vendor f.o.b. shipping point on December 27, 2011, were received on January 3, 2012. The merchandise cost $18,000. The purchase was not recorded until 2012.
Required:
1. Determine the correct amounts for 2011 ending inventory, purchases, accounts payable, sales revenue, and accounts receivable.
2. Calculate cost of goods sold for 2011.
3. Describe the steps Capwell would undertake to correct the error in the 2010 ending inventory. What was the effect of the error on 2010 before-tax income?
purchases from xavier corporation were incorrectly recorded at 41,000 instead of 14,000. Should we adjust purchases and accounts payable?
Foster Company acquired Robert Corporation for $10 million on January 1, 2011. Included in this amount was goodwill of $500,000. Which of the following is true of consolidated statements prepared as of December 31, 2011?
To determine the correct amounts for 2011 ending inventory, purchases, accounts payable, sales revenue, and accounts receivable, we need to consider the information provided.
1. Ending Inventory:
- The physical count of the ending inventory is $326,000.
- Adjustment 1: Deduct the goods held on consignment from Dix Company valued at $32,000 from the physical count. This was not recorded as a purchase.
- Adjustment 2: Correct the recording of purchases from Xavier Corporation from $41,000 to $14,000. The correct amount is already included in the ending inventory.
Corrected Ending Inventory = Physical count - Adjustment 1 - Adjustment 2
= $326,000 - $32,000 - ($41,000 - $14,000)
= $317,000
2. Purchases:
- The unadjusted trial balance shows purchases of $620,000.
- Adjustment 2: Correct the recording of purchases from Xavier Corporation. Deduct the incorrect amount of $41,000 and add the correct amount of $14,000.
Corrected Purchases = Unadjusted Purchases + Adjustment 2
= $620,000 + ($14,000 - $41,000)
= $593,000
3. Accounts Payable:
- The unadjusted trial balance shows accounts payable of $210,000.
- Adjustment 3: Include the goods received on January 3, 2012, with a cost of $25,000 from the vendor. This purchase and related accounts payable were recorded in 2011.
Corrected Accounts Payable = Unadjusted Accounts Payable + Adjustment 3
= $210,000 + $25,000
= $235,000
4. Sales Revenue:
- The unadjusted trial balance shows sales revenue of $840,000.
- Adjustment 6: Deduct the sale of goods shipped on December 25, 2011, but received by the customer on January 4, 2012. The sales price was $40,000, and the merchandise cost was $22,000. This sale and corresponding accounts receivable were recorded in 2011.
Corrected Sales Revenue = Unadjusted Sales Revenue - Adjustment 6
= $840,000 - $40,000
= $800,000
5. Accounts Receivable:
- The unadjusted trial balance shows accounts receivable of $225,000.
- Adjustment 6: Deduct the sale of goods shipped on December 25, 2011, but received by the customer on January 4, 2012, including an accounts receivable of $40,000.
Corrected Accounts Receivable = Unadjusted Accounts Receivable - Adjustment 6
= $225,000 - $40,000
= $185,000
Now let's move on to the next question.
2. Cost of Goods Sold for 2011:
To calculate cost of goods sold, we need the beginning inventory and the purchases amount.
- Beginning Inventory: This information is not provided in the question.
- However, we know that the 2010 balance sheet reported inventory of $352,000, which was understated by $62,000 due to a mathematical error. Therefore, the correct beginning inventory would be $352,000 + $62,000 = $414,000 (assuming no other adjustments are needed).
Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory
= $414,000 + $593,000 - $317,000
= $690,000
The correct cost of goods sold for 2011 is $690,000.
3. To correct the error in the 2010 ending inventory, Capwell would need to adjust the balance sheet by adding $62,000 to the inventory amount. They should make a journal entry to increase the inventory account by $62,000 and decrease retained earnings by the same amount.
Effect of the error on 2010 before-tax income:
Since the error resulted in an understatement of inventory, it means the cost of goods sold for 2010 was overstated. As a result, the before-tax income for 2010 was lower than it should have been.