Question

q.12

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

2016: Ending inventory was overstated by $54,000 while depreciation expense was overstated by $24,200.
2017: Ending inventory was understated by $13,500 while depreciation expense was understated by $4,200.
By how much should retained earnings be adjusted on January 1, 2018? (Ignore taxes)

Multiple Choice

• Decrease by $30,000.

• Increase by $40,500.

• Decrease by $33,500.

• Increase by $33,500.

Answer 1

Error in inventory is a counterbalance error which means the error made in 2016 ending inventory was adjusted when opening stock of 2017 was overstated.

So we have to give effect of remaining 3 errors.

Overstatement of depreciation in 2016 resulted in decrease in earnings. So we have to increase it.

Understated depreciation in 2017 result in increased earnings so we have to decrease it.

Understated ending inventory in 2017 resulted in decrease in earnings so we have to increase it.

So new adjustment

= $24200 increase + $13500 increase - $4200 decrease

= $33500 increase

answered by: anonymous