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Beta discovered ending inventory errors in 2015 and 2016. The 2015 ending inventory was overstated by...

Beta discovered ending inventory errors in 2015 and 2016. The 2015 ending inventory was overstated by $180 whereas the 2016 ending inventory was understated by $35. Ignoring taxes, by what amount should the beginning retained earnings be adjusted on January 1, 2017?

Using the same information in the previous problem, now assume that, in addition to the previously described inventory errors, depreciation expense was understated by 10 in 2015 and overstated by 25 in 2016. By what amount should beginning R.E. balance be adjusted on 1/1/17?

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Answer #1

1) Retained Earnings should be adjusted by $35 (Increase)

The Journal entry would be:

Inventory 35
     Retained Earnings 35

**Overstatement of $180 in 2015 ending inventory is counterbalanced by understatement of 2016 beginning inventory. So only understatement of $35 in ending inventory in 2016 needs adjustment.

2) Retained Earnings should be adjusted by $50 (Increase)

The Journal entry would be:

Inventory 35
Accumulated Depreciation / Asset 15
     Retained Earnings 50

**Net Overstatement of Depreciation = $25 - 10 = $15

So, total adjustment required in Retained Earnings = $35 (from 1) + $15 = $50

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