Diamond Limited (DL) is listed on the TSX, has a December 31 year-end, and uses a periodic inventory system. In early 20X3, a detailed examination of DL’s inventory records revealed the following:
1. Merchandise purchased on account from a supplier in 20X2 was recorded on DL’s books for the first time in January 20X3, when the original invoice for the correct amount of $43,000 arrived. The merchandise was shipped by the supplier fo. b. shipping point on December 29, 20X2 and arrived at DL’s warehouse on January 6, 20X3. This shipment of merchandise was not included in the December 31, 20X2 inventory count
2. The December 31, 20X2 inventory count included $65,000 of merchandise that was received from a supplier on December 30, 20X2. The merchandise was purchased f.o.b destination. The invoice for the $65,000 purchase arrived on January 5, 20X3 and was recorded by DL on January 6, 20X3.
3. Not included in the December 31, 20X2 inventory count was $159,000 of merchandise shipped and sold to a customer on December 30, 20X2 f.o.b. shipping point. DL received confirmation from the customer on January 7, 20X3 that the shipment had arrived in good order. On January 8, 20X3, DL sent an invoice to the customer and recorded the shipment as a sale on account for $195,000
4. Inventory, valued at $15,000, held by DL on consignment from another company was included in the December 31, 20X2 inventory count
Required:
(i) Calculate the combined effect of the errors related to the above items on DL’s 20X2 net income. Assume that none of the errors has been corrected and all dollar amounts involved are material. Ignore the effects of income tax. Show the effects of individual items as supporting calculations
(ii) Prepare the correcting entries for DL assuming that the books for 20X2 have not been closed.
(iii) Prepare the correcting entries for DL assuming that the books for 20X2 have already been closed
