The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc
ID: 2467084 • Letter: T
Question
The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2014, $149,850; 2015, $181,990. Early in 2016, the following errors were discovered.
Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
1. Depreciation of equipment for 2014 was overstated $12,490. 2. Depreciation of equipment for 2015 was understated $39,930. 3. December 31, 2014, inventory was understated $50,080. 4. December 31, 2015, inventory was overstated $15,310.Explanation / Answer
Notes:
Overstatement of depreciation increases the accumulated depreciation and decreases the net income thereby decreasing the retained earnings
Understatement of depreciaiton decreases the accumulated dpereciation and Increases the net income thereby increasing the retained earnings
Cost of goods sold = beginning inventory + purchase - ending inventory
if ending inventory is overstated then cost of goods sold will be understated thereby increasing the net income and consequently the retained earnings will increase.
If ending inventory is understated then cost of goods sold will be overstated thereby reducing the net profit and consequently the retained earnings will decrease.
Account Titles and Explanations Debit($) Credit($) Accumulated depreciation 12490 Retained earnings 12490 (correction for overstatement of depreciation) Retained earnings 39930 Accumulated depreciation 39930 (correction of understatement of depreciation) Inventory 50080 Retained earnings 50080 (correction of understatement of inventory) Retained earnings 15310 Inventory 15310 (correction of overstatement of inventory)