At the end of his first business year, Clifford Hudsick counted and priced the inventory. A few very high-value items were hidden in a dark corner of the storage shelves and Clifford understated his 20X5 ending inventory by $20,000. His business financial statements and his tax return were affected. Assume a 40% tax rate.

1. Calculate the effect on taxable income, taxes, net income, and retained earnings for 20X5.

2. Repeat requirement 1 for 20X6, assuming the 20X6 ending inventory is correctly calculated.