Question

Oriole Company reported the following amounts for its cost of goods sold and ending inventory:

		2021		2020
Cost of goods sold		$170,000		$175,000
Ending inventory		30,000		30,000

Oriole made two errors: (1) 2020 ending inventory was overstated by $10,500, and (2) 2021 ending inventory was understated by $9,000.

Calculate the correct cost of goods sold and ending inventory for each year.

		2021		2020
Correct ending inventory		$enter a dollar amount		$enter a dollar amount
Correct cost of goods sold		$enter a dollar amount		$enter a dollar amount

Describe the impact of the errors on profit for 2020 and 2021 and on owner’s equity at the end of 2020 and 2021. In 2020 profit is select an option overstatedunderstated by $enter a dollar amount , the amount of the error in ending inventory. This error flows through to owner’s equity in 2020 to produce an select an option overstatementunderstatement of $enter a dollar amount . In 2021 both errors have an impact. The net effect is an select an option overstatementunderstatement of profit by $enter a dollar amount . This is a result of the $10,500 select an option understatementoverstatement of the beginning inventory plus $enter a dollar amount select an option understatementoverstatement of ending inventory. Owner’s equity in 2021 would show only an select an option understatementoverstatement of $enter a dollar amount . The $10,500 select an option understatementoverstatement of 2020 would be offset by the $10,500 select an option understatementoverstatement in profit caused by the impact on beginning inventory in 2021.

Answer 1

	2021	2020
Correct ending inventory	$ 39,500	$ 19,500
	(30,000 + 9,500)	(30,000 - 10,500)
Correct cost of goods sold	$ 150,500	$ 185,500
	(170,000 - 10,500 - 9,000)	(175,000 + 10,500)

(1) In 2020 profit overstated by $10,500, the amount of the error in ending inventory. This error flows through to owner’s equity in 2020 to produce an overstatement of $10,500.

.

(2) In 2021 both errors have an impact. The net effect is an understatement of profit by $19,500.This is a result of the $10,500 overstatement of the beginning inventory plus $9,000 understatement of ending inventory.

.

(3) Owner’s equity in 2021 would show only an understatement of $9,000. The $10,500 overstatement of 2020 would be offset by the $10,500 understatement in profit caused by the impact on beginning inventory in 2021.