Question

Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would bea. no effect.b. net income was correct and current assets and current liabilities were overstated.c. net income, current assets, and current liabilities were overstated.d. net income and current liabilities were overstated.

Answer 1

The correct answer is option b. "net income was correct and current assets and current liabilities were overstated".

Step-by-step explanation:

A merchandise on consignment, must not be included in the Dolan Co. inventory because the owner of the merchandise is the consignor (the company who sells the merchandise). If Dolan Co. recorded the transaction as a purchase and included the goods in the inventory it will result in its financial statements having a correct net income but with current assets and current liabilities overstated, since the owner of the merchandise is not Dolan Co. The overstatement of assets is considered a fraud, as it could result in an artificial increase of earnings per share.

Answer 2

c. Net income, current assets and current liabilities were overstated.

Step-by-step explanation:

The consignment inventory does belong to Dolan Co. therefore when the goods are transferred no accounting entry is necessary hence ownership has not changed hands and is surely not a purchase.