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1. Bekins Inc. began operations on January 1, 1995. The following data pertains to the companys first two years in
business:
Reported Amount
Correct Amount
Inventory
Dec, 31, 1995
$20,000
$30,000
Dec. 31, 1996
$35,000
$35,000
Net Income after taxes
For 1995
For 1995
$60,000
$66,000
?
?
Retained Earnings
Dec. 31, 1995
Dec. 31, 1996
$60,000
$126,000
?
?
During 1995 and 1996, the companys income tax expense rate was 40% and the company declared no dividends.
Compute the correct amount for each of the following variables:
a. Net income for 1995
b. Net Income for 1996
c. Retained Earnings, December 31, 1995
d. Retained Earnings, December 31, 1996
2. Beretta Company uses a periodic inventory system and sells its merchandise for 100% above cost. The following
events occurred near the end of the first year of operations (year1):
a. The company failed to record the credit purchase of goods to which it received legal title during year 1.
Although the goods had not been sold by year end, the company did not include them int its ending inventory.
b. The company failed to record the credit sales of goods to which it surrendered legal title during year 1. The
company included the goods in its ending inventory.
c. The company included certain goods to which it had not yet received legal title in its ending inventory. The
company did not record a purchase of these goods.
d. The company recorded a credit purchase of goods to which it received legal title during year 1. Although the
goods had not been sold by year end, the company did not include them in its ending inventory.
e. The company recorded a credit purchase of goods to which it did not receive legal title during year 1. These
goods were included in the companys ending inventory.
Complete the matrix below. At the intersection of each row and column, indicate the effect of the event on the
financial statement variable at the end of year 1. Treat each event independently. Use the code: O=overstated,
U=understated, NE=No effect.
Event
a
b
c
d
e
f
Total
Total
Revenues
Expenses
(Sales
(COGS)
revenue)
Total
Total
Net
Total Stockholder's
Assets
Liabilities
Income (Inventory,
Equity
(A/P)
A/R)
$60,000
$66,000
$66,000
$60,000
Retained Earnings
Dec. 31, 1995
Dec. 31, 1996
$60,000
$126,000
$66,000
$126,000
During 1995 and 1996, the companys income tax expense rate was 40% and the company declared no dividends.
Compute the correct amount for each of the following variables:
a. Net income for 1995
b. Net Income for 1996
c. Retained Earnings, December 31, 1995
d. Retained Earnings, December 31, 1996
2. Beretta Company uses a periodic inventory system and sells its merchandise for 100% above cost. The following
events occurred near the end of the first year of operations (year1):
a. The company failed to record the credit purchase of goods to which it received legal title during year 1.
Although the goods had not been sold by year end, the company did not include them int its ending inventory.
b. The company failed to record the credit sales of goods to which it surrendered legal title during year 1. The
company included the goods in its ending inventory.
c. The company included certain goods to which it had not yet received legal title in its ending inventory. The
company did not record a purchase of these goods.
d. The company recorded a credit purchase of goods to which it received legal title during year 1. Although the
goods had not been sold by year end, the company did not include them in its ending inventory.
e. The company recorded a credit purchase of goods to which it did not receive legal title during year 1. These
goods were included in the companys ending inventory.
Complete the matrix below. At the intersection of each row and column, indicate the effect of the event on the
financial statement variable at the end of year 1. Treat each event independently. Use the code: O=overstated,
U=understated, NE=No effect.
Total
Total
Revenues
Event
Expenses
(Sales
(COGS)
revenue)
NE
NE
a
U
U
b
NE
U
c
NE
O
d
NE
NE
e
O
O
f
**A/R under by $10,000
E/I over by
5,000
Assets under by 5,000
Total
Total
Net
Assets
Total Stockholder's
Liabilities
Income (Inventory,
Equity
(A/P)
A/R)
NE
U
U
NE
U
U**
NE
U
O
O
NE
O
U
U
NE
U
NE
O
O
NE
O
O
NE
O
7. In each of the situations described below, indicate the effect of the error on the various elements of financial
statements prepared at the end of the current year.
Situation
no record made of goods
purchased on credit and
received on December 31.
Goods omitted from
inventory
Made sale in late
December; goods were
delivered on December 31
but were also included in
inventory on December 31
In taking the physical
inventory, some goods in a
warehouse were
overlooked
A purchase made late in
year was recorded properly
on the books, but goods
were not included in the
ending inventory
Revenues
Costs
and/or
expenses
Net
income
Assets
Liabilities
Owner's
equity
7. In each of the situations described below, indicate the effect of the error on the various elements of financial
statements prepared at the end of the current year.
Situation
Revenues
Costs
and/or
expenses
Net
income
Assets
Liabilities
Owner's
equity
NE
NE
NE
NE
NE
NE
NE
NE
NE
NE