Question

Waterway Enterprises reported cost of goods sold for 2020 of $1,385,600 and retained earnings of $5,415,900 at December 31, 2020. Waterway later discovered that its ending inventories at December 31, 2019 and 2020, were overstated by $103,320 and $38,040, respectively.

Determine the corrected amounts for 2020 cost of goods sold and December 31, 2020, retained earnings

a. Corrected cost of goods sold $___
b. Corrected 12/31/20 retained earnings $ ____.

Answer 1

(a) $1,320,320

(b) $5,377,860

Step-by-step explanation:

Given that,

Cost of goods sold for 2020 = $1,385,600

Retained earnings at December 31, 2020 = $5,415,900

Ending inventories at December 31, 2019 overstated by $103,320

Ending inventories at December 31, 2020 overstated by $38,040

Cost of goods sold is calculated as follows:

= Beginning inventory + Purchases during the period - Ending inventory

The closing inventory is overstated by $38,040, indicates that the large amount of ending inventories is deducted while calculating the cost of goods sold. Therefore, it is added to the cost of goods sold.

The beginning inventory is overstated by $103,320, indicates that the large amount of opening inventory is added while calculating the cost of goods sold. Therefore, it is deducted to the cost of goods sold.

(a) Corrected cost of goods sold:

= Incorrect cost of goods sold for 2020 + Overstated ending inventory - Overstated opening inventory

= $1,385,600 + $38,040 - $103,320

= $1,320,320

(b) The retained

Corrected 12/31/20 retained earnings:

= Incorrect retained earnings - Overstated ending inventory at December 31, 2020

= $5,415,900 - $38,040

= $5,377,860

The retained earnings is calculated on the basis of higher ending inventories, so it must be deducted from the retained earnings.