Watson Company’s financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Inventory on December 31, 2008, is overstated by $64,000, and inventory on December 31, 2009, is understated by $35,000.
1. For each key financial statement figure—(a), (b), (c), and (d) above—prepare a table similar to the following to show the adjustments necessary to correct the reported amounts.
Analysis Component
2. What is the error in total net income for the combined three-year period resulting from the inventory errors? Explain.
3. Explain why the overstatement of inventory by $64,000 at the end of 2008 results in an overstatement of equity by the same amount in that year.

  • CreatedMarch 18, 2015
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