I really need your help!
Question)
An internal audit has discovered that a new employee-an accounting clerk-had been stealing merchandise and covering up the shortage by changing the inventory records. For example, if 120 units were purchased at $20 per units, he would record it as 100 units purchased at $24 per unit and then steal the other 20 units.
The external auditors examined the accouting records prior to the employment of the individual and noted that the company has an average gross margin rate of 40%. They estimate that 95% of the incorrectly costed units have been sold.
What would be the effect on the net income for the year ending November 30, 2010, if the inventory shortage had not been discovered? For the year ending November 30, 2011?
The below is the jounal entry used the gross margin method to estimate the cost of the inventory shortage.
(Journal)
Inventory shortage expense $10,800(dr)
Merchandise inventory $ 540(cr)
Cost of goods sold $10,260(cr)
My answer was net income would be decreased by $10,260 at year ended Nov. 30, 2010 and by $540 at year ended Nov. 30, 2011.
My practice book indicated it was correct but my instructor graded it wrong!
Please advise me!
