Watson Company’s financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Inventory on December 31, 2010, is overstated by $70,000, and inventory on December 31, 2011, is understated by $55,000.
|
|
For Year Ended December 31 |
2010 |
2011 |
2012 |
|
(a) |
Cost of goods sold |
$ 655,000 |
$ 957,000 |
$ 799,000 |
|
(b) |
Net income |
225,000 |
277,000 |
244,000 |
|
(c) |
Total current assets |
1,251,000 |
1,360,000 |
1,200,000 |
|
(d) |
Total equity |
1,387,000 |
1,520,000 |
1,250,000 |
Required
1. For each key financial statement figure — (a), (b), (c), and (d) above — prepare a table similar to the following to show the adjustments necessary to correct the reported amounts.
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Figure: |
2010 |
2011 |
2012 |
|
Reported amount |
|
||
|
Adjustments for: 12/31/2010 error |
|
|
|
|
12/31/2011 error |
|
||
|
Corrected amount |
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2. What is the error in total net income for the combined three year period resulting from the inventory errors? Explain.
3. Explain why the overstatement of inventory by $70,000 at the end of 2010 results in an overstatement of equity by the same amount in that year.