Tarleton Company discovered ending inventory errors in 2017 and 2018. The 2017 ending inventory was overstated by $215,000 whereas the 2018 ending inventory was understated by $85,000. Ignoring income tax effects, by what amount should the beginning retained earnings be adjusted on January 1, 2019?
A) $85,000 debit
B) $85,000 credit
C) $130,000 debit
D) $215,000 credit

Question

Quizplus · Accepted Answer

The overstatement of ending inventory in 2017 would have resulted in an overstatement of cost of goods sold and therefore an understatement of net income. This would have resulted in an understatement of retained earnings at the end of 2017. The understatement of ending inventory in 2018 would have resulted in an understatement of cost of goods sold and therefore an overstatement of net income. This would have resulted in an overstatement of retained earnings at the end of 2018. The net effect of these two errors is an understatement of retained earnings at the beginning of 2019 by $85,000.

Tarleton Company Discovered Ending Inventory Errors in 2017 and 2018