Question

CBSC Cor reported its first two-year net income as $234,000 for 2018 and $176,000 for 2019. In Early 2020, CBSC discovered the errors:

                                                                   2018                                                    2019               

Ending inventory $10,000 understatement $20,000 overstatement

Depreciation expense 16,000 overstatement 18,000 understatement

(ignore tax effects)

The journal entry to correct the above errors in the year 2020 includes:

Select one:

a. Credit Accumulated depreciation by $38,000

b. Credit inventory by $10,000

c. Debit Retained earnings by $22,000

d. Debit retained earnings by $12,000

Answer 1

			2018			2019			Net Effect
Ending Inventory			$ 10,000.00	understatement		$ 20,000.00	overstatement		$ 10,000.00	overstatement
Depreciation Expense			$ 16,000.00	overstatement		$ 18,000.00	understatement		$   2,000.00	understatement

It means, at the beginning of 2020, net income was overstated by $ 12000 (i.e., $ 10000 + $ 2000)

To correct this, we need to Debit Retained Earnings by $ 12000

Answer: D

Do let me know if you find this incorrect