Answer and Explanation:
According to the scenario, computation of the given data are as follow:-
1). Effect of the errors on cost of goods sold:-
2014 - Cost of goods sold overstated by $6,000.
2015 - Cost of goods sold understated by $18,000.
Effect of the errors on net income:-
2014 - Retained earnings understated by $6,000.
2015 - Retained earnings overstated by $18,000.
Effect of the errors on net income:-
2014 - Retained earnings understated by $6,000.
2015 - Retained earnings overstated by ($9,000+$3,000)=$12,000.
2).Journal Entry to Rectify the Errors.
Cost of goods sold A/c Dr. $6,000
To Merchandise inventory A/c $6,000
(Being the rectification of understated inventory of 2014 is recorded)
Merchandise inventory A/c $6,000
To Cost of goods sold A/c $6,000
(Being the rectification of overstated inventory of 2015 is recorded)
3).If the financial statement is inaccurate resulting in one mistake in 2014 and the impact of three errors in 2015 and considering the correct inventory numbers, revenue, cost of goods sold and retained earnings will be retrospective until those figures are again recognized for comparative purposes in the annual report for 2016.
Retained earnings should be reported in an earlier period of adjustment, and a disclosure notice would also be made explaining the extent of the mistake and the effect of its correction on the net income, earnings per share and earnings before extraordinary items each year.
