Question

Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be:________.
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.

Answer 1

Answer:

Option B Net income was correct and current assets and current liabilities were overstated.

Explanation:

The double entry that Dane Co. has passed is as under:

Dr Purchases XX

Cr Trade Payable XX

Now the consignment is not legally owned by the Dane Co. because it companies earn a commission on delivery of consignment, which means that the above double entry must not have been passed in the books of accounts.

As we know that the purchase account is the sub-account of Inventory account and it is debit in nature so this means that the inventory has been overstated. Likewise the Trade payables is liability and is credit in nature. Passing an increase in trade payables which must not be passed means that the current liabilities are also overstated.