Effect on Net Income of Inventory Errors
The Martin Company reported income before taxes of $370,000 for 2007 and $526,000 for 2008. A later audit produced the following information:
(a) The ending inventory for 2007 included 2,000 units erroneously priced at $5.90 per unit. The correct cost was $9.50 per unit.
(b) Merchandise costing $17,500 was shipped to the Martin Company, FOB shipping point, on December 26, 2007. The purchase was recorded in 2007, but the merchandise was excluded from the ending inventory because it was not received until January 4, 2008.
(c) On December 28, 2007, merchandise costing $2,900 was sold to Deluxe Paint Shop. Deluxe had asked Martin in writing to keep the merchandise for it until January 2, when it would come and pick it up. Because the merchandise was still in the store at year-end, the merchandise was included in the inventory count. The sale was correctly recorded in December 2007.
(d) Craft Company sold merchandise costing $1,500 to Martin Company. The purchase was made on December 29, 2007, and the merchandise was shipped on December 30. Terms were FOB shipping point. Because the Martin Company bookkeeper was on vacation, neither the purchase nor the receipt of goods was recorded on the books until January 2008.
Assume that all amounts are material and a physical count of inventory was taken every December 31.
1. Compute the corrected income before taxes for each year.
2. By what amount did the total income before taxes change for the two years combined?
3. Assume all errors were found in February 2008, just after the books were closed for 2007.What journal entry would be made? Martin uses a periodic inventory system.