Chapter 20, Problem 20.19E

Error correction; inventory error

• LO20–6

During 2018, WMC Corporation discovered that its ending inventories reported on its financial statements were misstated by the following amounts:

2016	understated by	$120,000
2017	overstated by	150,000

WMC uses the periodic inventory system and the FIFO cost method.

Required:

1. Determine the effect of these errors on retained earnings at January 1, 2018, before any adjustments. Explain your answer. (Ignore income taxes.)

2. Prepare a journal entry to correct the error.

3. What other steps would be taken in connection with the error?

On December 12, 2018, an investment costing $80,000 was sold for $100,000. The total of the sale proceeds was credited to the investment account.