Problem # 3 (Inventory Errors) 30 points

At December 31, 2016, McGlaggen Corporation reported current assets of $638,000 and current liabilities of $384,000. The following items may have been recorded incorrectly. McGlaggen uses the periodic method.

1. Goods purchased costing $10,000 were shipped f.o.b. destination by a supplier on December 26.

McGlaggen received and recorded the invoice on December 31, 2016 but the goods were not included in McGlaggens physical count of inventory because they were not received until January 2, 2017.

2. Freight-in of $4,000 was debited to advertising expense on December 28, 2016.

3. Goods purchased costing $11,000 were shipped f.o.b. shipping point by a supplier on December

28. McGlaggen received and recorded the invoice on December 29, but the goods were not included in McGlaggens physical count of inventory because they were not received until January 4, 2017.

4. Goods held on consignment from Brown Company were included in McGlaggens physical count of

inventory at $13,000.

Instructions

(a) Compute the current ratio based on McGlaggens balance sheet.

(b) Recompute the current ratio after corrections are made.

(c) By what amount will income (before taxes) be adjusted up or down as a result of the

corrections?