Question

Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2015 and 2014 contained errors as follows:

                                                                                   2015                                          2014 Ending inventory                                          $6,000 overstated                      $16,000 overstated

Depreciation expense                                  $4,000 understated                    $12,000 overstated

Assume that no correcting entries were made at December 31, 2014. Ignoring income taxes, by how much will retained earnings at December 31, 2015 be overstated or understated?

Answer 1

	Calculation of retained earnings overstated as on 2014
	Inventory overstated in 2014 (Resulting in increase in profits)	$16,000
	Less: Depreciation overcastsed (Resulting in decrease in profits)	($12,000)
	Net increase in retained earnings	$4,000
	Calculation of retained earnings overstated as on 2015
	Retained earnings overstated as on 2014 (Opening)	$4,000
	Less: Undercast of inventory in 2015 (overcast in 2014 - over cast in 2015) = 16000-6000 = 10,000 Actual overcast in inventory should be 16,000 as on 2015 since inventory is balance sheet item will have effect on next period but 2015 overcast is only 6000 that means in 2015 inventory undercasted by 10,000	($10,000)
	Add: undecast in depreciation in 2015 (resulting in increase in profits)	$4,000
	Net Undercast of Retained earnings as on 2015	($2,000)
Ans	Undercast in retained earnings as on 2015= 2,000