If ending inventory is understated by $8,000 in 20X3,and assuming a constant 30% tax rate,then what will be the effect on retained earnings on December 31,20X4?
A)The 20X4 ending retained earnings will be understated by $2,400.
B)The 20X4 ending retained earnings will be overstated by $2,400.
C)The 20X4 ending retained earnings will be understated by $5,600.
D)The 20X4 ending retained earnings will be overstated by $5,600.
E)The 20X4 ending retained earnings will not be understated or overstated.

Question

Quizplus · Accepted Answer

The error in ending inventory in 20X3 will self-correct in 20X4, as the beginning inventory of 20X4 will be understated by the same amount, thus offsetting the initial error. Retained earnings will not be affected by the end of 20X4.

If Ending Inventory Is Understated by $8,000 in 20X3,and Assuming