During 2018, WMC Corporation discovered that its ending inventories reported on

Question

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

   
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.

Explanation / Answer

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 )

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