In 2021, the controller of Sytec Corporation discovered that $54,000 of inventory purchases were incorrectly charged...
In 2021, the controller of Sytec Corporation discovered that $54,000 of inventory purchases were incorrectly charged to advertising expense in 2020. In addition, the 2020 year-end inventory count failed to include $36,000 of company merchandise held on consignment by Erin Brothers. Sytec uses a periodic inventory system. Other than the omission of the merchandise on consignment, the year-end inventory count was correct. The amounts of the errors are deemed to be material.
Required:
1. Determine the effect of the errors on retained
earnings at January 1, 2021. (Ignore income taxes.)
2. Prepare a journal entry to correct the
errors.
Homework Answers
Determine the effect of the errors on retained earnings at January 1, 2021
| Beginning Inventory | ||
| Add: Net Purchases ( incorrectly charged to advertising expense ) |
Understated | $54,000 |
| Less : Ending Inventory (the 2020 year-end inventory count failed to include $36,000) |
Understated | $36,000 |
| Cost of Goods Sold | Understated | $18,000 |
| Revenue | ||
| Cost of Goods Sold | Understated | $18,000 |
| Less : Other Expense (Advertising Exp.) | Overstated | $54,000 |
| Net Income Understated | Understated | $36,000 |
| retained earnings understated | Understated | $36,000 |
Hence retained earnings understated by $36,000
2) a journal entry to correct the errors.
| Date | Account Titles | Debit ($) | Credit ($) |
| Inventory ( understatement of 2021 beginning inventory) |
36,000 | ||
| Retained Earnings ( understatement of 2020 income) |
36,000 | ||
| (to record the retained earning) |
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