accounting-Joyce Cathey owns Southwest Golf Shop.

QUESTION

Joyce Cathey owns Southwest Golf Shop. She has reviewed the following preliminary
financial data prepared for the year ending December 31, 20X8:

Sales
$
500,000

Cost of goods sold
260,000

Gross profit
240,000

Operating expenses
200,000

Income before tax
40,000

Joyce has determined that the above data were based on
assumptions that beginning-of-year inventory was $230,000 and end-of-year
inventory was $265,000. The company
uses a periodic inventory system.

Joyce has owned the golf shop for many years and is surprised
and disappointed with these financial results. Accordingly, she has conducted an extensive
review of the accounting for selected transactions. Her reviewed turned up the following
errors:

A spreadsheet of
beginning inventory included 35 Zing golf bags at a cost of $20 each. These particular bags were the nicest in
the store, and the unit cost was actually $200. The error was the result of incorrect data
entry into the spreadsheet.

The ending inventory
value was the result of a physical count on December 31, 20X8. The count failed to include 2,400
imprinted logo golf balls that were in the custody of employees who were
going to be giving them away as promotional items at a New Year’s day parade
on January 1, 20X9. These balls cost
$1.50 each.

The company
experienced a theft loss during 20X8.
The theft consisted of 6 sets of Caldaway golf clubs that normally
sell for $1,000 each, and provide a gross profit margin of 45%. The insurance company purchased replacement
goods and delivered them to Southwest Golf Shop. These club sets were included in the year
end physical inventory and valued at $1,000 each.

In 20X8, the company
consigned golf apparel with a retail value of $30,000 to a vendor at a local
golf tournament. The cost to retail
percentage on apparel is 60%. At the
conclusion of the tournament, the vendor returned $12,000 (at retail) of
goods and $18,000 in cash. The
agreement was that Southwest Golf Shop would pay the vendor a commission
equal to 15% of the gross profit margin on sales. The commission has not yet been calculated
or paid.

At year end, the
company had 10 units of the Big Face driver in stock. The drivers had a unit cost of $300, and
were included in the year end inventory at $3,000 total. The manufacturer of Big Face has just
announced a new driver, the Square Face.
These units will render the Big Face mostly obsolete. Even though the manufacturer will continue
to offer Big Face for sale at a dealer cost of $300, it is anticipated the
customers will now be willing to pay no more than $200 retail for the item.

Determine the correct income statement and inventory
values. Will Joyce be pleased with the
revised results?

The
various errors are analyzed below.

A spreadsheet of
beginning inventory included 35 Zing golf bags at a cost of $20 each. These particular bags were the nicest in
the store, and the unit cost was actually $200. The error was the result of incorrect data
entry into the spreadsheet.

The ending inventory
value was the result of a physical count on December 31, 20X8. The count failed to include 2,400
imprinted logo golf balls that were in the custody of employees who were
going to be giving them away as promotional items at a New Year’s day parade
on January 1, 20X9. These balls cost
$1.50 each.

The company
experienced a theft loss during 20X8.
The theft consisted of 6 sets of Caldaway golf clubs that normally
sell for $1,000 each, and provide a gross profit margin of 45%. The insurance company purchased replacement
goods and delivered them to Southwest Golf Shop. These club sets were included in the year
end physical inventory and valued at $1,000 each.

ANSWER:

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