Question

Black, Inc. is a calendar-year corporation whose financial statements for 2012 and 2013 included errors as follows:

Year Ending Inventory Depreciation Expense
2012 $162,000 overstated $135,000 overstated
2013 59,000 understated 45,000 understated
Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2012, or at December 31, 2013. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2014?
a. $149,000 increase
b. $41,000 increase
c. $14,000 decrease
d. $13,000 increase

Answer 1

To calculate the adjustment to Black, Inc.'s retained earnings at January 1, 2014, we need to determine the cumulative effect of the errors on the 2012 and 2013 financial statements. The errors resulted in a total decrease of $401,000, so Black, Inc.'s retained earnings should be retroactively adjusted by $14,000 decrease. Option c

Step-by-step explanation:

To calculate the adjustment to Black, Inc.'s retained earnings at January 1, 2014, we need to determine the cumulative effect of the errors on the 2012 and 2013 financial statements.

For 2012, the inventory was overstated by $162,000 and the depreciation expense was overstated by $135,000. This means that Black, Inc.'s expenses were overstated by a total of $297,000 in 2012.

For 2013, the inventory was understated by $59,000 and the depreciation expense was understated by $45,000. This means that Black, Inc.'s expenses were understated by a total of $104,000 in 2013.

Therefore, the cumulative effect of the errors on Black, Inc.'s retained earnings at January 1, 2014 would be a decrease of $401,000 ($297,000 + $104,000). So, the correct answer is c. $14,000 decrease.