Question

Windsor Enterprises reported cost of goods sold for 2020 of $1,298,600 and retained earnings of $4,941,400 at December 31, 2020. Windsor later discovered that its ending inventories at December 31, 2019 and 2020, were overstated by $119,050 and $32,440, respectively. Determine the corrected amounts for 2020 cost of goods sold and December 31, 2020, retained earnings. Corrected cost of goods sold $enter a dollar amount Corrected 12/31/20 retained earnings $enter a dollar amount

Answer 1

a) The Corrected Cost of Goods Sold is $1,298,600 + $32,440 - $119,050 = $1,211,990.

This means that the Cost of Goods Sold in the current period is overstated by $86,610 i.e. the difference between $119,050 and $32,440.

b) The Corrected 12/31/20 Retained Earnings is $5,028,010. This amount is obtained by adding back the amount by which Cost of Goods Sold is overstated, i.e. $86,610 to the stated Retained Earnings balance.

Step-by-step explanation:

Cost of goods sold is derived by adding opening inventory to purchases and deducting the closing inventory.

When closing inventory figures of December 31, 2019 and 2020 are overstated, the cost of goods sold for 2020 will be affected in two opposite ways. One, when the opening inventory is overstated, it increases the cost of goods sold. Two, when the closing inventory is overstated, the cost of goods sold for the current period is reduced.

These overstatements also affect the reported net income. One, overstated opening inventory reduces net income as it increases the cost of goods sold. Two, overstated closing inventory increases net income as it reduces the cost of goods sold for the period.

Answer 2

Corrected Cost of Goods sold is $1211990.

Corrected 12/31/20 retained earnings are $5028010.

Step-by-step explanation:

The ending inventory at December 31, 2019 is the opening inventory for 2020. An overstatement of ending inventory means an overstatement of opening inventory. The opening inventory is added in cost of goods sold. Thus, the amount by which opening inventory is overstated should be reduced from cost of goods sold.

The overstatement of ending inventory, on the other hand, reduced the cost of goods sold as the ending inventory is subtracted when calculating cost of goods sold. Thus, the amount by which the ending inventory is overstated should be added to the cost of goods sold.

The correct value of cost of goods sold is,

Corrected value of COGS = COGS + Amount of ending inventory overstatement - amount of opening inventory overstatement

Corrected value of COGS = 1298600 + 32440 - 119050 = $1211990

The retained earnings is the amount of net income retained or ploughed back into the business. When calculating net income, we subtract the amount of cost of goods sold. As a result of inventory overstatement, the amount of Cost of Goods sold was overstated by,

Overstatement in COGS = COGS before adjustment - Adjusted COGS

Overstatement in COGS = 1298600 - 1211990 = $86610

The cost of goods sold were overstated by $86610 and as a result, the profit was understated by the same amount as we deduct the COGS from sales to compute profit. The retained earnings, thus, are also understated by $86610 and the correct balance of retained earnings at the year end should be,

Corrected retained earnings = 4941400 + 86610 = $5028010