Langley Company received merchandise on December 31, 2014. Langley failed to record the purchase on account because the invoice was inadvertently destroyed. The merchandise was, however, included in ending inventory. The effect of this event on the financial statements as of December 31, 2014, would be
A) assets and liabilities would be understated
B) assets and owners' equity would be overstated
C) liabilities would be understated and retained earnings overstated
D) liabilities would be overstated and retained earnings understated

Question

Quizplus · Accepted Answer

The merchandise was included in ending inventory, so assets are correctly stated. However, since the purchase was not recorded, liabilities are understated, and because expenses are understated, retained earnings are overstated.

Langley Company Received Merchandise on December 31, 2014