Question

Windsor Enterprises reported cost of goods sold for 2020 of $1,298,600 and retained earnings of $4,941,400 at December 31, 2020. Windsor later discovered that its ending inventories at December 31, 2019 and 2020, were overstated by $119,050 and $32,440, respectively.
Determine the corrected amounts for 2020 cost of goods sold and December 31, 2020, retained earnings.

Corrected cost of goods sold..........................$__________

Corrected 12/31/20 retained earnings............$____________

Answer 1

Answers:

Corrected cost of goods sold	$ 1,211,990
Corrected retained earnings	$ 4,908,960

Calculations:

Corrected cost of goods sold	=$ 1,298,600 - $ 119,050 + $ 32,440
Corrected retained earnings	=$ 4941,400 - $ 32,440

For Correct COGS - As opening stock was overstated, it needs to be reduced. Opening stock is treated like an expense and so if it is reduced, COGS also reduces. As closing stock was overstated, it needs to be reduced. Closing stock is treated as revenue and so if it is reduced, COGS also increases.

For retained earnings - Opening stock does not impact the Closing balance Sheet and its items. Reduction in closing stock will reduce retained earnings as it will result in loss.

In case of any doubt, please comment.