The September 30, 2011, physical inventory of Baxter Corporation appropriately included $3,800 of merchandise purchased on account that was not recorded in purchases until October 2011. What effect will this error have on September 30, 2011, assets, liabilities, retained earnings, and earnings for the year then ended, respectively?
A) Understate; no effect; overstate; overstate
B) No effect; overstate; understate; understate
C) No effect; understate; overstate; overstate
D) No effect; understate; understate; overstate

Question

Quizplus · Accepted Answer

The error of not recording the purchase of $3,800 will result in an understatement of assets at September 30, 2011, as the merchandise purchased on account is not included in the inventory count. This error will result in an overstatement of the liability in October when the bill is recorded, as the merchandise will be recorded as a liability even though it has been included in the inventory count. The error will result in an overstatement of retained earnings at September 30, 2011, as the cost of the merchandise has not been recognized as an expense. This error will also result in an overstatement of earnings for the year ended September 30, 2011, as the cost of the merchandise has not been recognized as an expense. Therefore, the correct answer is C.

The September 30, 2011, Physical Inventory of Baxter Corporation Appropriately