Question

During 2021, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated by the following amounts:
2019 understated by $134,000
2020 overstated by 178,000

WMC uses the periodic inventory system and the FIFO cost method.
Required:
1-a. Determine the effect of 2019 errors on retained earnings at January 1, 2021, before any adjustments. (Ignore income taxes.)
1-b. Determine the effect of 2020 errors on retained earnings at January 1, 2021, before any adjustments. (Ignore income taxes.)
2. Prepare a journal entry to correct the error in 2021.
3. Will WMC account for the error (a) retrospectively or (b) prospectively?

Answer 1

Answer:

The answers  fro part 1 for (a) and (b)to this questions are explained in the explanation section below. (2) A journey was prepared for the entries to correct the error in 2021 (3) retrospectively

Explanation:

Solution

PART 1(A)

2019

     The beginning inventory - No effect

     Ending Inventory - Understated

     The cost of good -Overstated

     Net income - Understated

     Retained earnings - Understated

No effect on any particulars in 2019 (effect  of 2019)

PART 1 (B)

2020

     The beginning inventory - Understated

     Ending Inventory - Overstated

     The cost of good -Understated

     Net income - Overstated

     Retained earnings - Overstated

(2) JOURNAL ENTRY

                                                  Debit ($)      Credit ($)

Retained  earnings Alc Debit  178,000

                  To inventory                                178,000  

(3) It is retrospectively