Question

At December 31, 2024, Betty Harris Corporation reported current assets of $390,576 and current liabilities of $189,600. The following items may have been recorded incorrectly. Harris uses a perpetual inventory system. 1. Goods purchased costing $20,180 were shipped fo.b. shipping point by a supplier on December 28 . Harris received and recorded the invoice on December 29,2024 , but the goods were not included in Harris's inventory because they were not received until January 4,2025. 2. Goods purchased costing $15,740 were shipped fo.b. destination by a supplier on December 26 . Harris received and recorded the invoice on December 31, but the goods were not included in Harris's 2024 inventory because they were not feceived until January 2, 2025. 3. Goods held on consignment from Claudia Kishi Company were included in Harris's December 31, 2024, inventory at $13,700. By what amount will income (before taxes) be adjusted up or down as a result of the corrections? Adjust income

Answer 1

The adjustments to income for incorrectly recorded inventory items at Betty Harris Corporation will result in a net decrease of $6,480. Goods purchased f.o.b. shipping point should be included, and goods on consignment should be excluded from inventory, affecting the cost of goods sold and income.

Step-by-step explanation:

The student's question regarding adjustments to current assets, current liabilities, and income due to inventory recording issues is squarely in the realm of accounting principles, specifically concerning inventory recognition and consignment. To determine how these potential recording errors at Betty Harris Corporation would impact income (before taxes), we need to analyze each scenario individually:

1. Goods purchased f.o.b. shipping point on December 28, costing $20,180, were recorded on December 29 but not included in the inventory. These goods should be included in Harris's 2024 inventory because title passes to the buyer when the supplier ships the goods, thus inventory would increase by $20,180, and income would decrease by the same amount due to higher cost of goods sold (COGS).
2. Goods purchased f.o.b. destination on December 26, costing $15,740, were recorded on December 31 but not included in the inventory. These goods should not be included in the 2024 inventory because title passes upon delivery, which did not occur until 2025. Thus, no adjustment to income is required for these goods.
3. Goods held on consignment costing $13,700 were incorrectly included in Harris's inventory. Because the consignor, not the consignee (Harris), retains title to consigned goods, this amount should be deducted from inventory. As a result, income would increase by $13,700 as the overstatement of inventory previously increased COGS.

In summary, income before taxes should be adjusted down by $20,180 due to the f.o.b. shipping point goods not included, and adjusted up by $13,700 due to consignment goods incorrectly included. Therefore, the net adjustment to income from these corrections will be a decrease of $6,480.