During 2021, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated by the following amounts:

2019 understated by $134,000
2020 overstated by 178,000

WMC uses the periodic inventory system and the FIFO cost method.
Required:
1-a. Determine the effect of 2019 errors on retained earnings at January 1, 2021, before any adjustments. (Ignore income taxes.)
1-b. Determine the effect of 2020 errors on retained earnings at January 1, 2021, before any adjustments. (Ignore income taxes.)
2. Prepare a journal entry to correct the error in 2021.
3. Will WMC account for the error (a) retrospectively or (b) prospectively?

The answers fro part 1 for (a) and (b)to this questions are explained in the explanation section below. (2) A journey was prepared for the entries to correct the error in 2021 (3) retrospectively

Explanation:

Solution

PART 1(A)

2019

The beginning inventory - No effect

Ending Inventory - Understated

The cost of good -Overstated

Net income - Understated

Retained earnings - Understated

No effect on any particulars in 2019 (effect of 2019)

PART 1 (B)

2020

The beginning inventory - Understated

Ending Inventory - Overstated

The cost of good -Understated

Net income - Overstated

Retained earnings - Overstated

(2) JOURNAL ENTRY

Debit ($) Credit ($)

Retained earnings Alc Debit 178,000

To inventory 178,000

(3) It is retrospectively

topeadeniran2 topeadeniran2 · Answer 2 · 2025-03-26T22:48:14-04:00

The effect of 2019 errors on retained earnings at January 1, 2021, before any adjustments will be an understatement of the ending inventory and an overstatement of the cost of goods.

Based on the information given, there's no effect on the beginning inventory. There's an understatement of the ending inventory, overstatement of the cost of goods, understatement of net income, and understatement of the retained earnings.

The journal entry to correct the error in 2021 will be:

Debit Retained earnings $178000
Credit Inventory $178000

In conclusion, WMC will account for the error retrospectively.

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