The reported net incomes for the first 2 years of Sandra Gustafson Products, Inc., were as follows: 2014, $147,000; 2015, $185,000. Early in 2016, the following errors were discovered.

1. Depreciation of equipment for 2014 was overstated $17,000.
2. Depreciation of equipment for 2015 was understated $38,500.
3. December 31, 2014, inventory was understated $50,000.
4. December 31, 2015, inventory was overstated $16,200.

Prepare the correcting entry necessary when these errors are discovered. Assume that the books are closed. (Ignore income tax considerations.)

Debit 2016 Beginning retained earning for $37,700;

Credit Accumulated depreciation for $21,500, and

Credit Inventory for $16,200.

Explanation:

The entries will affect the 2016 beginning Retained earning except for the December 31, 2014 inventory which was understated by $50,000 which was a self correcting error at the end of 2015.  

Accumulated depreciation = Understatement of 2015 depreciation - Overstatement of 2014 depreciation = $38,500 - 17,000 = $21,500

The entries will affect the 2016 beginning retained earning as follows:

Details                                                         Dr ($)                  Cr ($)

Beginning retained earning                     37,700

Accumulated depreciation                                                21,500

Inventory - 2015 Overstatement                                       16,200

To correct the error discovered in the accounts.                             .

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