Hello,

Could you please explain in detail why the adjusting entry isn't $54,000 based on the question bellow and the pictured solution? I don't understand why we aren't subtracting both the 12,000 and the $42,000 from revenue leaving us with $54,000 in understated net income and therefore 54,000 inunderstated R/E. Thank you very much in advance.

In 2016, the controller of Sytec Corporation discovered that $42,000 of inventory purchases were incorrectly charged to advertising expense in 2015. In addition, the 2015 year-end inventory count failed to include $30,000 of company merchandise held on consignment by Erin Brothers. Sytec uses a periodic inventory system. Other than the omission of the merchandise on consignment, the year-end inventory count was correct. The amounts of the errors are deemed to be material.

Required:

1) Determine the effect of the errors on retained earnings at January 1, 2016. Explain your answer. (Ignore income taxes.)

2) Prepare a journal entry to correct the errors.

U Understated Analysis: Overstated 2015 Beginning inventory Plus: net purchases U by 42,000 Less: ending inventory U by 30,000 Cost of goods sold U by 12,000 Revenues Less: cost of goods sold U by 12,000 Less: other expenses O by 42,000 U by 30,000 Net income U by 30,000 Retained earnings Requirement 2 Inventory (understatement of 2016 beginning inventory) 30,000 Retained earnings (understatement of 2015 income) 30,000