Question

Powell Company had the following errors over the last two years.

2019: Ending inventory was overstated by $ 54,000 while depreciation expense was overstated by $25,400.

2020: Ending inventory was understated by $5,500 while depreciation expense was understated by $4,800.

BY how much retained earning be adjusted on January 1, 2021 ( Ignore taxes)

Answer 1

Answer:

Adjusted retained earnings

$ 25,700.00

Calculation:

For 2019
Ending inventory (Note 1)	$(54,000.00)
Depreciation (Note 2)	$ 25,000.00
For 2020
Opening Inventory (Note 3)	$ 54,000.00
Ending inventory	$    5,500.00
Depreciation	$ (4,800.00)
Adjusted retained earnings	$ 25,700.00

Explanation:

Note 1: Ending inventory is equivalent to Income. If ending inventory is overstated, it needs to be reduced, and so profit reduces, and vice versa.

Note 2: Depreciation expense is an expense. If depreciation is overstated, it needs to be reduced which increases the profit, and vice versa.

Note 3: Closing inventory of 2019 becomes opening inventory of 2020. So, it will have impact in 2020 as well.

In case of any doubt, please feel free to comment.