During 2018, WMC Corporation discovered that its ending inventories reported on
ID: 2524296 • Letter: D
Question
During 2018, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated by the following amounts: invcenories by th ollowing amout 2016 2017 understated by overstated by $120,000 150,000 WMC uses the periodic inventory system and the FIFO cost method. Required: 1. Determine the effect of these errors on retained earnings at January 1, 2018, before any adjustments. Explain your answer.(Ignore income taxes.) 2. Prepare a journal entry to correct the error. 3. What other steps would be taken in connection with the error?Explanation / Answer
1. Gross profit would be understated by $120000 in 2016 and Overstated in 2017 by $150000. Therefore net effect would result in overstated retained earning on 1 Jan 2018 by $ 30000.
Understatement of closing inventory means that gross profit is reported at lesser amount and also net profit.
OTHER VIEW
If the error is discovered after closing of book then the opposite effect will take place in beginning of the next year. With this concept there will be no effect on the retained earning on 1 Jan 2018.
2. Journal entry in 2016
Inventory A/c Dr. $120000
To Retained earning A/c $120000
(Inventory understated)
Journal entry in 2017
Retained earning A/c Dr. $150000
To Inventory A/c $150000
(ending Inventory overstated in 2017)
3. Method of valuation of inventory should be followed in consistent manner. It is the basic requirement of any accounting method. Change in method should be supported by reasonable requirement. WMC using two method of inventory valuation periodic inventory and FIFO. This can be avoided to prevent such errors.
Note - For doubt feel free to get in touch using comment section. :)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.