Reinhoff Inc. reported total assets of €2,600,000, including €435,000 for inventory, and equity of €1,690,0000 on the December 31, 2014 statement of financial position. Reinhoff subsequently determined that the ending inventory was understated by €63,000. What is the corrected amount of equity for the year?

Question

Quizplus · Accepted Answer

Since the ending inventory was understated by €63,000, this means that expenses were overstated by the same amount. As a result, net income was understated by €63,000. Since equity is equal to assets minus liabilities, and there are no changes to liabilities, the correction of the inventory error will increase the assets by €63,000. Therefore, the corrected equity is €1,753,000 (€2,600,000 - €435,000 + €63,000 = €2,228,000 - €475,000 = €1,753,000).