Problem 20-10
You have been hired as the new controller for the Ralston Company.
Shortly after joining the company in 2013, you discover the following
errors related to the 2011 and 2012 financial statements:
a. Inventory at 12/31/2011 was understated by $6,000
b. Inventory at 12/31/2012 was overstated by $9,000
c. On 12/31/2012, inventory was purchased for $3,000. The company
did not record the purchase until the inventory was paid for early in
2013 At the time,
2013.
time the purchase was recorded by a debit to purchases
and a credit to cash.
The company uses a periodic system.
Parts 1 and 2: Assuming that the errors were discovered after the 2012
financial statements were issued, analyze the effect of the errors on
2012 and 2011 cost of goods sold, net income, and retained earnings.
(Ignore income taxes.) Prepare the journal entries to correct the
errors.
©Dr. Chula King
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Problem 20-10 (continued)
a. 2011: EI (Cr) U/S  COGS (Dr) O/S  NI (Cr) U/S  R/E (Cr) U/S
R/E Ok
2012: BI (Dr) U/S  COGS (Dr) U/S  NI (Cr) O/S 
No entry is required
b. 2012: EI (Cr) O/S  COGS (Dr) U/S  NI (Cr) O/S  R/E (Cr) O/S
The other account that is incorrect is the asset inventory which is
overstated.
R/E
9,000
Inventory
9,000
c. 2012: Purchases (Dr) U/S  COGS (Dr) U/S  NI (Cr) O/S  R/E
(Cr) O/S.
The other account that is incorrect is Purchases in 2013 which is
overstated
R/E
3,000
Purchases
3,000
©Dr. Chula King
All Rights Reserved
Problem 20-10 (continued)
Part 3: What other step(s) would be taken in connection with the error?
If presented with 2013 financial statements for comparative purposes, the
incorrect financial statements from 2011 and 2012 would be
retrospectively restated to report the correct amounts for inventory, cost
of goods sold, net income and retained earnings. A prior period
adjustment to retained earnings would be required, along with a
disclosure note describing the nature of the errors and the impact of their
correction on each yyear’s net income,, income before extraordinary
y
items, and EPS.
©Dr. Chula King
All Rights Reserved