Powell Company had the following errors over the last two years: 2019: Ending inventory was overstated by $58,500 while depreciation expense was overstated by $24,800. 2020: Ending inventory was understated by $10,500 while depreciation expense was understated by $4,600. By how much should retained earnings be adjusted on January 1, 2021? (Ignore taxes)

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Business

Edgar Ward

28 March, 17:16

Powell Company had the following errors over the last two years: 2019: Ending inventory was overstated by $58,500 while depreciation expense was overstated by $24,800. 2020: Ending inventory was understated by $10,500 while depreciation expense was understated by $4,600. By how much should retained earnings be adjusted on January 1, 2021? (Ignore taxes)

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Randy Howe · Answer 1

-$27,800

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. When an expense is overstated, the net income is understated and so is the retained earnings.

The net overstatement of inventory across the two periods

= $58,500 - $10,500

= $48,000

The net overstatement of depreciation across the two periods

= $24,800 - $4,600

= $20,200

Adjustments to retained earnings

= - $48,000 + $20,200

= - $27,800