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During 2018, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated...

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

2016 understated by $ 132,000
2017 overstated by 174,000

   
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.

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2016 If closing inventory is understated the Retained earnings are lower too.
The Effect will be like this:
2016 Closing Inventory is Understated, it means Cost of Goods Sold is Overstated, it means Retained Earnings of 2016 is Understated by $ 132,000.
2017 Opening Inventory is Under stated, it means Cost of Goods Sold is Understated, it means Retained Earnings of 2017 is Overstated by $ 132,000.
Conclusion The effect is nullified. So Retained earnings is ok now. Because it was Understated by $ 132,000 in 2016 but automatically got overstated $ 132,000 in 2017..
2017 If closing inventory is Overstated the Retained earnings are overstated too.
2017 Closing Inventory is Overstated, it means Cost of Goods Sold is Understated, it means Retained Earnings of 2017 is Overstated by $ 174,000.
2018 Retained Earnings is Overstated by $ 174,000.
Journal entry to correct the error made in 2017.
Dr Cr
Retained Earnings 174,000.00
Inventory 174,000.00

ekkarill92 answered 10 months ago
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