Question

During 2018, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2016 - $ 120,000 understated 2017 - $ 150,000 overstated P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P's retained earnings at January 1, 2018, would be:A. $270,000 overstated
B. $150,000 overstated
C. correct
D. $30,000 overstated

Answer 1

Answer:

D. $30,000 overstated

Explanation:

Understatement of ending Inventory overstate the value of cost of Goods sold and understate the value of Net income and retained earning as well.

Overstatement of ending Inventory understate the value of cost of Goods sold and overstate the value of Net income and retained earning as well.

In 2016 the net income and retained earning was understated by $120,000.

In 2017 the net income and retained earning was overstated by $150,000.

Net Effect of both event in Retained earning at January 1, 2018

$150,000 overstated - $120,000 understated = $30,000 overstated