Question

Texan Inc. had the following errors over the last two years: 2020: Ending inventory was overstated by $60,000 while depreciation expense was overstated by $25,700. 2021: Ending inventory was understated by $12,500 while depreciation expense was understated by $6,400. By how much should retained earnings be adjusted on January 1, 2022

Answer 1

-$28,200

Step-by-step explanation:

when the inventory closing balance is overstated, the cost of goods sold is understated and as such the net income which is posted to the retained earnings will be overstated.

For the overstatement of depreciation, the net income will be understated by the same amount.

The reverse is the effect on net income for these items where the misstatement is otherwise.

Retained earnings adjustments required on January 1, 2022

= -$60,000 + $25,700 + $12,500 - $6,400

= -$28,200