Question

The net income for the current year for the Morton Company is $240,000. Their reported total assets for the year are $1,800,000. After some calculations, it is determined that at the beginning of the year the inventory was overstated by $18,000, which was never corrected. The current year inventory is correct. The corrected amount for total assets and net income for the year is ___________?

Answer 1

net income = $258,000

total assets = $1,800,000

Step-by-step explanation:

since the inventory was overstated at the beginning of the year, the COGS were overstated, reducing net income by $18,000. So the adjustment at the end of the year should increase net income by $18,000.

Last year both assets and retained earnings were overstated by the error, so this year they must be adjusted. Since net income increases, then retained earnings should increase, this will offset any change in the balance sheet. The same applies to assets, last years overstating of inventory will be offset by this year's understating.

Answer 2

Total Assets will be $ 1782 000 and net income will be $ 222 000.

Step-by-step explanation:

Since inventory is overstated by $18000 we need to adjust cost of sales for the current year.

Since we don't have the figure we need to know by how much Cost of sales changes so we can adjust the current income which is given (240000).

Using the following formula we can work out the amount that cost of sales need to change by. Opening Inventory + Purchases - Closing Inventory.

Since closing inventory is being reduced by 18000 cost of sales will increase by 18000. This will in return decrease income by 18000. The new income figure will be $ 222 000 and total assets will be reduced by 18000. The new asset figure will be $ 1782 000.