Question

2019: Ending inventory was overstated by $30,000 while depreciation expense was overstated by $24,000. 2020: Ending inventory was understated by $5,000 while depreciation expense was understated by $4,000. By how much should retained earnings be adjusted on January 1, 2021?

Answer 1

$25,000

Step-by-step explanation:

The computation of the adjusted balance of retained earning is shown below:

Since the depreciation expense is overstated on 2019 which decreased the earnings so it would be added

Since the depreciation expense is understated on 2020 which increased the earnings so it would be deducted

And, the ending inventory for 2020 is understated which decreased the earning so it would be added

Therefore, the adjusted balance is

= $24,000 - $4,000 + $5,000

= $25,000