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.

b. Corrected 2020 cost of goods sold = $ 1,320,320.

b. Corrected retained earnings = $5,377,860.

Explanation:

a. Determine the corrected amounts for 2020 cost of goods sold

An overstatement of the beginning inventory has to be deducted from the reported cost of good sold since the amount of the overstatement was added to the cost of goods sold initially.

On the other hand, an overstatement of the ending inventory has to be added to the reported cost of good sold since the amount of the overstatement was deducted to the cost of goods sold initially.

Therefor, we have:

Corrected 2020 cost of goods sold = $1,385,600 - $103,320 + $38,040 = $ 1,320,320.

b. Determine the corrected amounts for December 31, 2020, retained earnings

In this case, the amount of overstatement of the ending inventory has to be deducted from the reported retained earning since the retained earning was initially overstated by that amount.

Therefore, we have:

Corrected retained earnings = $5,415,900 - $38,040 = $5,377,860