Dexter Inc. is a celender-year corporation. Its financialstatements for the year

Question

Dexter Inc. is a celender-year corporation. Its financialstatements for the years 2007 and 2006 contained errors asfollows:                                           2007                                                2006 EndingInventory               $3,000overstated                           $8,000overstated DepreciationExpense       $2,000understated                          $6,000 overstated Assume that no correcting enteries were made at December31,2006. Ignoring income taxes, by how much will retained earningsat December 31,2007 be overstated or understated? Dexter Inc. is a celender-year corporation. Its financialstatements for the years 2007 and 2006 contained errors asfollows:                                           2007                                                2006 EndingInventory               $3,000overstated                           $8,000overstated DepreciationExpense       $2,000understated                          $6,000 overstated Assume that no correcting enteries were made at December31,2006. Ignoring income taxes, by how much will retained earningsat December 31,2007 be overstated or understated?

Explanation / Answer

IN2006 Net profit overstatedwith $8000 due to overstated of ending inventory Net profitunderstated with $6000 due to overstted Depreciation        Net effect: Net profitoverstated with $2000 In2007 Net profit understed with $5000 due tooversted beginning Inventory and oversted of ending inventory Net profit overstated $2000 due tounderstated $2000 of depreciation.         Net effect: Net profitunderstated with $3000 On 31 December2007 Retained earning overstated in2006 $2000 Net profit understaded in2007          $3000 Net effect on Retained earningunderstated with $1000 on 31 December 2007

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