Question

Brief Exercise 8-10

Indigo Enterprises reported cost of goods sold for 2017 of $1,338,800 and retained earnings of $5,268,500 at December 31, 2017. Indigo later discovered that its ending inventories at December 31, 2016 and 2017, were overstated by $114,680 and $34,830, respectively.

Determine the corrected amounts for 2017 cost of goods sold and December 31, 2017, retained earnings.

Corrected cost of goods sold		$
Corrected 12/31/17 retained earnings		$

Answer 1

Inventory error made in 2016 will reverse itself in 2017 and thus it will not effect of 2017.

Due to overstated inventory of 2017, net income of 2017 will be overstated by $34,830 and thus retained earnings are also overstated by $34,830.

Corrected 12/31/17 retained earnings = $5,268,500-$34,830

= $5,233,670

Ending inventory of 2016 is the beginning inventory of 2017. Thus, beginning and ending inventory of 2017 are overstated. Hence, corrected cost of goods sold will be calculated as under:

Corrected cost of goods sold = 1,338,800-114,680+34,830

= $1,258,950

Corrected cost of goods sold	1,258,950	$
Corrected 12/31/17 retained earnings	5,233,670	$

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