Question

Bienvenu Enterprises reported cost of goods sold for 2020 of $1,400,000 and retained earnings of $5,200,000 at December 31, 2020. Bienvenu later discovered that its ending inventories at December 31, 2019 and 2020, were overstated by $110,000 and $35,000, respectively.

Determine the corrected amounts for 2020 cost of goods sold and December 31, 2020, retained earnings.
Corrected cost of goods sold ?
Corrected 12/31/20 retained earnings ?

Answer 1

The corrected cost of goods sold for Bienvenu Enterprises for 2020 is $1,325,000, and the corrected retained earnings as of December 31, 2020, are $5,090,000, reflecting adjustments for the inventory overstated in 2019 and 2020.

Step-by-step explanation:

The student has asked how to correct the reported cost of goods sold and retained earnings for Bienvenu Enterprises for the year 2020 after discovering inventory errors. To correct the cost of goods sold (COGS), you subtract the overstatement from the previous year's ending inventory and add the overstatement from the current year's ending inventory. Consequently, the corrected COGS for 2020 is $1,400,000 - $110,000 + $35,000 = $1,325,000. To correct the retained earnings, you need to adjust the net income for the overstatement in the ending inventory, which would have previously inflated the earnings. Since the inventory was overstated in 2019, the retained earnings reported at the end of 2020 would need to be decreased by the 2019 overstatement to reflect the true value, making the corrected retained earnings for December 31, 2020, $5,200,000 - $110,000 = $5,090,000.