Below is information relating to Wrong Way Inc., a subsidiary of a U.S. publicly traded manufacturer of murder mystery games. The company uses the last-in, first-out (LIFO) cost flow assumption. Additional information on inventory during Year 1 includes the following: Click the icon to view the additional information.) Requirement For each of the independent scenarios (a) through (d), indicate in the following table the effect of the accounting errors on the books of Wrong Way Inc. Specifically, identify the amount and direction of over- or understatement of inventory and income for Year 1 and Year 2. If an account requires no adjustment, indicate that the account is "correct." (If an account is correct, leave the amount cell blank. Do not enter a "0") Year 1 Year 2 Income Income Inventory Misstated? Amount Inventory Misstated? Amount Misstated? Amount Misstated? Amount - More info Beginning-of-year finished goods inventory 30,000 units Units finished during Year 1 330,000 units End-of-year finished goods inventory 25,000 units Beginning-of-year work-in-process (in equivalent units) 35,000 units Ending work-in-process (in equivalent units*) 35,000 units (*For example, 10 units that are each 40% complete are equal to 4 equivalent units.) a. One of Wrong Way's products became obsolete and worthless during Year 1, but the inventory write-down did not occur until Year 2. The cost of this inventory was $40,000 b. In the Year 1 closing inventory count, employees improperly included 1,400 units of finished goods that had already been sold to customers. These units had a cost of $21,000 under LIFO. C. An invoice for $22,000 of material received and used in production arrived after the year-end. Neither the purchase nor the accounts payable was recorded. However, the amount of raw materials in ending inventory was correct based on the inventory count. d. In Year 1, Wrong Way incurred the following expenditures: Factory labour $ 700,000 Materials used in manufacturing 500,000 150 000 finished goods that had already been sold to customers. These units had a cost of $21,000 under LIFO. C. An invoice for $22,000 of material received and used in production arrived after the year-end. Neither the purchase nor the accounts payable was recorded. However, the amount of raw materials in ending inventory was correct based on the inventory count d. In Year 1, Wrong Way incurred the following expenditures: Factory labour $ 700,000 Materials used in manufacturing 500,000 Variable overhead 150,000 Subtotal 1,350,000 Transportation cost of raw materials 110,000 Factory depreciation 1,000,000 Salary of production vice-president 90,000 Salary of marketing vice-president 95,000 Advertising cost for new game 150,000 $ 2,795,000 Wrong Way's accountants debited only $1,350,000 into the inventory (work-in-process) account. The remainder was expensed as period costs
