Question

During 2018, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated by the following amounts:

2016	understated by	$	148,000
2017	overstated by		206,000

   
WMC uses the periodic inventory system and the FIFO cost method.

Required:
1-a. Determine the effect of 2016 errors on retained earnings at January 1, 2018, before any adjustments. (Ignore income taxes.)
1-b. Determine the effect of 2017 errors on retained earnings at January 1, 2018, before any adjustments. (Ignore income taxes.)
2. Prepare a journal entry to correct the error made in 2017.

Answer 1

1 a THE OPENING INVENTORY AS ON 1 JANUARY, 2017, WHICH WAS THE CLOSING INVENTORY FOR THE YEAR 2016, IS UNDRSTATED BY $ 148000. THIS IMPLIES INCREASE IN THE GROSS PROFIT OF I JANUARY, 2018. THIS WILL RESULT IN INCREASE IN NET PROFITS AND LEAD TO OVERSATED RETAINED EARNINGS.

1 b. THE CLOSING INVENTORY OF THE YAER 2017 IS OVERSTATED BY $206000. THIS IMPLIES INCREASE IN THE GROSS PROFIT OF I JANUARY, 2018. THIS WILL RESULT IN INCREASE IN NET PROFITS AND LEAD TO OVERSATED RETAINED EARNINGS.

2. CORRECTIVE JURNAL ENTRY:-

RETAINED EARNINGS A/C DR.       $354000

     TO INVENTORY A/C                                    $354000

( THE OVERSTATED AMOUNT )