Kirtland Corporation uses a periodic inventory system. At the end of the annual accounting period, December 31, the accounting records for the most popular item in inventory showed the following:

Kirtland Corporation uses a periodic inventory system. At the end of the annual accounting period, December 31, the accounting records for the most popular item in inventory showed the following:

	Transactions	Units	Unit Cost
Beginning inventory, January 1		480	$3.00
Transactions during the year:
a.	Purchase, January 30	380	4.20
b.	Purchase, May 1	540	4.00
c.	Sale ($5 each)	(240)
d.	Sale ($5 each)	(780)

 

Required:

a. Compute the amount of goods available for sale.

Explanation:

a.

Goods available for sale for all methods:

	Units	Unit Cost		Total Cost
January 1, Beginning inventory	480	$	3.00	$	1,440
January 30, Purchase	380		4.20		1,596
May 1, Purchase	540		4.00		2,160
Goods available for sale	1,400			$	5,196

Ending inventory: 1,400 units – (240 + 780) = 380 units

b. & c.
 

Average cost:

Average unit cost	$5,196 ÷ 1,400 = $3.71
Ending inventory	(380 units × $3.71)	$	1,410.34
Cost of goods sold1	($5,196 – $1,410.34)	$	3,785.66

  
¹Direct computation of Cost of goods sold: (1,020 units × $3.71) = $3,785.66

First-in, first-out:

Ending inventory	(380 units × $4.00)	$	1,520
Cost of goods sold2	($5,196 – $1,520)	$	3,676

   
²Direct computation of Cost of goods sold: [(480 units @ $3.00) + (380 units @ $4.20) + (160 units @ $4.00)] = $3,676

Last-in, first-out:

Ending inventory	(380 units × $3.00)	$	1,140
Cost of goods sold3	($5,196 – $1,140)	$	4,056

³Direct computation of Cost of goods sold: [(100 units @ $3.00) + (380 units @ $4.20) + (540 units @ $4.00)] = $4,056
 

Specific identification:

Ending inventory	(0 units × $3.00) +
	(236 units × $4.20) +
	(144 units × $4.00)	$	1,567.20
Cost of goods sold4	($5,196 – $1,567.20)	$	3,628.80

⁴Direct computation of Cost of goods sold: [(480 units @ $3.00) + (144 units @ $4.20) + (396 units @ $4.00)] = $3,628.80

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Grants Corporation prepared the following two income statements (simplified for illustrative purposes):

Grants Corporation prepared the following two income statements (simplified for illustrative purposes):

	First Quarter						Second Quarter
Sales revenue			$	11,700							$	20,000
Cost of goods sold
Beginning inventory	$ 3,800						$	3,700
Purchases	3,400							12,600
Goods available for sale	7,200							16,300
Ending inventory	3,700							9,800
Cost of goods sold				3,500								6,500
Gross profit				8,200								13,500
Expenses				4,100								5,300
Pretax income			$	4,100							$	8,200

During the third quarter, it was discovered that the ending inventory for the first quarter should have been $4,260.

Required:

1. What effect did this error have on the combined pretax income of the two quarters?

No effect 

2. Which quarter's (if any) EPS amount were affected by this error?

Both quarters 

3. Prepare corrected income statements for each quarter.

Explanation:

1.

The $560 understatement of ending inventory produced pretax income amounts that were incorrect by the amount of $560 for each quarter. However, the effect on pretax income for each quarter was opposite (i.e., the first quarter pretax income was understated by $560, and in the second quarter it was overstated by $560). This self-correcting produces a correct combined income for the two quarters.

2.

The error caused the pretax income for each quarter to be incorrect [see (1) above]; therefore, it produced incorrect EPS amounts for each quarter.

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