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$121,000 2017 overstated by d by$12 151,000 WMC uses a 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. (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.) ed earnings would be

Explanation / Answer

1 2016 Effect 2017 Effect Revenues Revenues Beginning inventory Beginning inventory overstated Add: purchases Add: purchases Less: Ending inventory understated Less: Ending inventory overstated Cost of goods sold overstated Cost of goods sold understated Less: other expenses Less: other expenses Net income understated Net income overstated retained earnings understated retained earnings overstated Retained earnings is overstated by the amount of ending inventory 151000, due to increase in expenses, there would be decrease in the net income by the same amount and thereby retained earnings 2 Date Accounts and Explanation Debit Credit 2017 Retained earnings 151000 Inventory 151000 ( To record the rectification entry in retained earnings, due to overstatement of ending inventory)

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