Question

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.

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Answer #1

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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