During 2018, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P's retained earnings at January 1, 2018, would be:
A) Correct.
B) $30,000 overstated.
C) $150,000 overstated.
D) $270,000 overstated.

Question

During 2018, P Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:  P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, P's retained earnings at January 1, 2018, would be:
A) Correct. 
B) $30,000 overstated. 
C) $150,000 overstated. 
D) $270,000 overstated.

Quizplus · Accepted Answer

The $120,000 understated ending inventory would cause the 2016 COGS to be overstated, understating NI and RE. That same error would cause 2017 beginning inventory to be understated, overstating NI and RE by the same amount, effectively correcting the RE balance. The $150,000 overstated ending inventory would cause the 2017 COGS to be understated, overstating NI and RE.

During 2018, P Company Discovered That the Ending Inventories Reported