Question

The reported net incomes for the first 2 years of Splish Products, Inc., were as follows: 2020, $156,100; 2021, $196,600. Early in 2022, the following errors were discovered.

a. Depreciation of equipment for 2020 was overstated $15,500.
b. Depreciation of equipment for 2021 was understated $36,200.
c. December 31, 2020, inventory was understated $45,400.
d. December 31, 2021, inventory was overstated $17,200.

Required:
Prepare the correcting entry necessary when these errors are discovered.

Answer 1

Answer and Explanation:

The preparation of the correcting entry is as follows;

Retained Earning $37,900 (-$17,200 + $15,500 - $36,200)

To Inventory $17,200

To Accumulated Depreciation $20,700

(Being the correcting entry is recorded)

here the retained earning is debited as it decreased the equity and the other two accounts are credited as it decreased the assets