Question

Question: Hallam 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, 2016, is overstated by \(18,000 and inventory on December 31, 2017, is understated by \)26,000.

For the year ended December 31	2016	2017	2018
(a) Cost of goods sold	\(207,200	\)213,800	$197,030
(b) Net income	175,800	212,270	184,910
(c) Total Current assets	276,000	277,500	272,950
(d) Equity	314,000	315,000	346,000

Required

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.

Figures	2016	2017	2018
Reported Amount
Adjustments for 12/31/2016 Error
12/31/2017 Error
Corrected Amount

Short answer

Answer

Line item	2016	2017	2018
Cost of goods sold	$225,200	$169,800	$223,030
Net income	$157,800	$256,270	$158,910
Total current assets	$258,000	$285,500	$298,950
Equity	$296,000	$359,000	$320,000

Step-by-step solution

Definition of Equity

Equity defines the line item of the balance sheet that reports the capital contributed by the shareholders. It includes the ordinary shares, preferred shares, and retained earnings.

Calculation of corrected amount

(a) Cost of goods sold:

Figures	2016	2017	2018
Reported Amount	$207,200	$213,800	$197,030
Adjustments for 12/31/2016 Error	18,000	(18,000)	0
12/31/2017 Error	0	(26,000)	26,000
Corrected Amount	$225,200	$169,800	$223,030

(b) Net income:

Figures	2016	2017	2018
Reported Amount	175,800	212,270	184,910
Adjustments for 12/31/2016 Error	(18,000)	18,000	0
12/31/2017 Error	0	26,000	(26,000)
Corrected Amount	$157,800	$256,270	$158,910

(c) Total current assets:

Figures	2016	2017	2018
Reported Amount	276,000	277,500	272,950
Adjustments for 12/31/2016 Error	(18,000)	(18,000)	26,000
12/31/2017 Error	0	26,000	0
Corrected Amount	$258,000	$285,500	$298,950

(d) Equity:

Figures	2016	2017	2018
Reported Amount	314,000	315,000	346,000
Adjustments for 12/31/2016 Error	(18,000)	18,000	0
12/31/2017 Error	0	26,000	(26,000)
Corrected Amount	$296,000	$359,000	$320,000