Question

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)

Answer 1

Answer:

-$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