Answer:
Reduction is retained earnings by $40,000
The correcting journal entries:
Dr merchandise inventory $40,000
Cr Retained earnings $40,000
Explanation:
The impact of the omitted consigned inventory and the inventory purchases debited to advertising expenses are shown below
increase in purchases $62,000
omitted closing inventory ($40,000)
increase in cost of goods sold $22,000
Reduction in advertising expenses $62,000
Increase in retained earnings $40,000
The implication of this is that the closing inventory was lower by $40,000 and retained earning was lower by the same amount
The correcting journal entries:
Dr merchandise inventory $40,000
Cr Retained earnings $40,000
It is noteworthy that a lower closing inventory means a higher cost of goods ,as a result a lower operating profit and retained earnings
