Inventory Error The following condensed income statements and balance sheets are available for Planter Stores for a two-year period. (All amounts are stated in thousands of dollars.)

Income Statements 2010 2009 Revenues $35,982 $26,890 Cost of goods sold 12,594 9,912 Gross profi t $23,388 $16,978 Operating expenses 13,488 10,578 Net income $ 9,900 $ 6,400 Balance Sheets December 31, 2010 December 31, 2009 Cash $ 9,400 $ 4,100 Inventory 4,500 5,400 Other current assets 1,600 1,250 Long-term assets, net 24,500 24,600 Total assets $40,000 $35,350 Current liabilities $ 9,380 $10,600 Capital stock 18,000 18,000 Retained earnings 12,620 6,750 Total liabilities and stockholders’ equity $40,000 $35,350 Before releasing the 2010 annual report, Planter’s controller learns that the inventory of one of the stores (amounting to $500,000) was counted twice in the December 31, 2009, inventory. The inventory was correctly counted in the December 31, 2010, inventory.

Required 1. Prepare revised income statements and balance sheets for Planter Stores for each of the two years. Ignore the effect of income taxes.

2. Compute the current ratio at December 31, 2009, before the statements are revised and compute the current ratio at the same date after the statements are revised. If Planter applied for a loan in early 2010 and the lender required a current ratio of at least 1 to 1, would the error have affected the loan? Explain your answer.

3. If Planter did not prepare revised statements before releasing the 2010 annual report, what would be the amount of overstatement or understatement of net income for the two-year period? What would be the overstatement or understatement of retained earnings at December 31, 2010, if revised statements were not prepared?

4. Given your answers to parts (2) and (3), does it matter if Planter bothers to restate the fi nancial statements of the two years to correct the error? Explain your answer.

AppendixLO1