When preparing its financial statements at the end of 2015

#3191
When preparing its financial statements at the end of 2015, Thorn Retail Inc. dis-covered an
error in accounting for inventory. When Thorn started to purchase merchandise from a new
supplier, it expensed all transportation costs rather than capitalizing them as a cost of the
inventory. It estimated that a portion of the transportation costs were erroneously expensed in
2014 and 2015. Transportation costs were $ 326,367 and $ 333,784 in fiscal 2014 and 2015,
respectively. The company expensed all of the transportation costs in the year incurred, when
they should have capitalized a portion of the costs as ending inventory. Thorn determined that
90% of the inventory purchased in 2014 was sold in 2014 and 92% of the inventory purchased
in 2015 was sold in 2015. Assume all inventory on- hand at the beginning of the year is sold
during the year. Assume no tax implications. Round to the nearest dollar. Here is information
from Thorn’s financial statements before any adjustment:Required a. Would net income have
been higher or lower in 2014, and by how much? What will Thorn report as net income in 2015?
b. What would Thorn report as its inventory and retained earnings balances at the beginning of
2015 and at December 31, 2015? c. Prepare the retained earnings portion of the statement of
stockholders’ equity for 2015. d. What is the necessary journal entry to record the prior- period
adjustment in 2015?View Solution:
When preparing its financial statements at the end of 2015

ANSWER
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