BE8-11

BE8-11 Estimated Disposal Costs 100 100 200 100

Item Jokers Kings Queens Jacks

Cost

$1,820 5000 4290 3,200 $14,310 Can this be done a total basis?

Estimated Selling Price 2100 4900 4625 4210

NRV 2000 4800 4425 4110 $15,335

LCM $1,820 4800 4290 3,200 $14,110

BE8-12

BE8-12 Cost NRV a) DIRECT METHOD Ending Inventory Loss (if any) is charged to CGS 31-Dec-09 Dr. COGS Cr. Inventory 31-Dec-10 Dr. COGS Cr. Inventory 31-Dec-11 No entry b) INDIRECT METHOD Balance of "Inventory" account -) Balance of "Allowance" account (Cr.) (plug) Ending Inventory reported on B/S Loss accrued during the year (plug) 31-Dec-09 Dr. Loss due to decline in NRV of inventory Cr. Allowance to reduce inventory to NRV 31-Dec-10 Dr. Loss due to decline in NRV of inventory Cr. Allowance to reduce inventory to NRV 31-Dec-11 Dr. Allowance to reduce inventory to NRV Cr: Gain due to recovery in NRV of inventory 2009 55,600 54,000 2010 68,700 61,625 2011 60,000 60,900

54,000 1,600

61,625 60,000 7,075 -

1,600 1,600

7,075 7,075

55,600 1,600 54,000 1,600

68,700 7,075 61,625 5,475

60,000 0 60,000 (7,075)

1,600 1,600

5,475 5,475

7,075 7,075

BE8-12

INDIRECT METHOD
Calculate Balances in T accounts

Inventory (2009) 55,600 (2010) 68,700 (2011) 60,000

Allowance 1,600 (2009) 5,475 (2010)

(2011) 7075

7075 (2010) Nil (2011)

E8-8 - error 1

Scenario 1: Ending inventory is overstated by $1,020, but purchases are recorded correctly. Current year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts payable Solution Working capital: Current Assets - Current liabilities Current ration: current assets / current liabilities Retained earnings Net income No error overstated by $1,020 understated by $1,020 overstated by $1,020 no error overstated by $1,020 overstated by $1,020 no error overstated by $1,020 no error overstated by $1,020 understated by $1,020 overstated by $1,020 no error no error no error Next year overstated by $1,020

Overstated Overstated Overstated Overstated

No effect No effect No effect Understated

If you adjusted for the error in current year Dr. COGS Cr. Inventory If you adjust for the error next year Dr. Retained earnings Cr. COGS

$1,020 1,020 1,020 1,020

E8-8 error 2

Scenario 2: Both ending inventory and a purchase on account are understated by the same amount. (Assume this purchase of $1,500 was recorded in the following year) Current year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts payable Next year understated by $1,500 overstated by $1,500 no effect no effect no effect no effect no effect no effect no effect No effect (an offset)

understated by $1,500 understated by $1,500 understated by $1,500 no effect no effect no effect no effect understated understated

Solution Working capital: Current Assets - Current liabilities No effect Current ratio: current assets / current liabilities (assuming the ratio >1) 1 Overstated Retained earnings No efffect Net income No effect If you adjusted for the error in current year Dr. Inventory Cr. Accounts Payable

No effect No effect No effect No effect

$1,500 1,500

If you adjust for the error next year fully disclose a description of the error. financial statement comparative figures would need adjustment for inventory increased by $1,500 and increase a/p by $1,500

Current ratio>1, both current assets and current liabilities are understated by the same amount, then the current ratio will be overstated; That is, if a / b > 1, then based on math deduction, (a-x) / (b-x) > a / b

E8-8 - error 3

Scenario 3: Ending inventory is correct, but a purchase on account was recorded. (Assume this purchase of $850 was recorded in the following year) Current year Beginning Inventory +PURCHASES =GOODS AVAILABLE Less: Ending Inventory = COGS Net Income Opening Retained Earnings Ending Retained Earnings Inventory Accounts Payable Solution Working capital: Current Assets - Current liabilities Current ratio: current assets / current liabilities (assuming the ratio >1) 1 Retained earnings Net income If you adjusted for the error in current year Dr. COGS Cr. Accounts Payable If you adjust for the error next year Dr. Retained Earnings Cr. Accounts payable Over Over Over Over No effect No effect No effect Under under by $850 under by $850 no error under by $850 over by $850 no effect over by $850 no effect Under Next year no effect over by $850 over by $850 no effect over by $850 Under by $850 No effect No effect (offset by under) no effect No effect (offset by over)

$850 850 850 850