Answer to Question #48793 in Accounting for Felisia Fitri Anita Aritonang

Question

Boss Motorcycle Shop sells motorcycles, ATVs, and other related supplies and accessories. During the taking of its physical inventory on December 31, 2010, Boss Motorcycle
Shop incorrectly counted its inventory as $195,750 instead of the correct amount of
$188,200.
a. State the effect of the error on the December 31, 2010, balance sheet of Boss Motorcycle
Shop.
b. State the effect of the error on the income statement of Boss Motorcycle Shop for
the year ended December 31, 2010.

Answer 1

During the taking of its physical inventory on December 31, 2010, Boss Motorcycle Shop incorrectly counted its inventory as $195,750 instead of the correct amount of $188,200.
a. State the effect of the error on the December 31, 2010, balance sheet of Boss Motorcycle Shop.
The error will cause the assets to be lower by 195,750 - 188,200 = $7,550 than in fact.
b. State the effect of the error on the income statement of Boss Motorcycle Shop for the year ended December 31, 2010.
But the net income of the Boss Motorcycle Shop will be higher by $7,550 minus taxes, because the total cost of production nominally decreased by $7,550.