Question

(Error Analysis and Correcting Entry) The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2017, \(147,000; 2018, \)185,000. Early in 2019, the following errors were discovered.

1. Depreciation of equipment for 2017 was overstated \(17,000.

2. Depreciation of equipment for 2018 was understated \)38,500.

3. December 31, 2017, inventory was understated \(50,000.

4. December 31, 2018, inventory was overstated \)16,200.

Instructions

Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)

Short answer

The adjustment to retained earnings will be $37,700, and journal entries will be retained earnings will be debited, and inventory and Accumulated depreciation will be credited.

Step-by-step solution

Calculation of Adjustment amount

$$\begin{gathered} \mathbf{Adjustmentamount}\mathbf{=}\mathbf{Overstatement}\mathbf{2018}\mathbf{Inventory}\mathbf{-}\mathbf{Overstatement}\mathbf{2017}\mathbf{depreciation}\mathbf{+}\mathbf{Understatement}\mathbf{2018}\mathbf{depreciation} \\ \mathbf{=}\mathbf{16}\mathbf{,}\mathbf{200}\mathbf{-}\mathbf{17}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{38}\mathbf{,}\mathbf{500} \\ \mathbf{=}\mathbf{\$}\mathbf{37}\mathbf{,}\mathbf{700} \end{gathered}$$

Journal Entry for the adjustment

Date	Particulars	Debit ($)	Credit ($)
	Retained Earnings	37,700
	Inventory		16,200
	Accumulated Depreciation Equipment		21,500
	(Being adjustment to retained earnings recorded)