During 2018, WMC Corporation discovered that its ending inventories reported in

Question

During 2018, WMC Corporation discovered that its ending inventories reported in its financial statements were misstated by the following material amounts 2016 understated by 2017 overstated by $123,000 153,000 WMC uses a periodic inventory system and the FIFO cost method. Required: . Determine the effect of these errors on retained earnings at January 1, 2018, before any adjustments. (Ignore income taxes.) 2. Prepare a journal entry to correct the errors. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Determine the effect of these errors on retained earnings at January 1, 2018, before any adjustments. (Ignore income taxes.) Retained earnings would be uired 1 Required 2 > overstated understated

Explanation / Answer

SOLUTION

(A) The 2016 error caused 2016 net income to be understated, but since 2016 ending inventory is 2017 beginning inventory, 2017 net income was overstated by the same amount. So, the income statement was misstated for 2016 and 2017, but the balance sheet (retained earnings) was incorrect only for 2016 with regard to this error. After that, no account balances are incorrect due to the 2016 error.

However, the 2017 error has not yet self-corrected. Both retained earnings and inventory still are overstated as a result of the second error.

(B) Journal Entry-

Account titles and Explanation Debit ($) Credit ($) Retained earnings  (overstatement of 2016 income) 153,000 Inventory (overstatement of 2017 beginning invemtory) 153,000 (To correct the error.)

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