QUESTION 2 FINANCIAL STATEMENT POLICIES, ESTIMATES AND ERROR CORRECTION

2.2. During 2021, Gamma Ltd discovered that some of their products sold during 2020 were incorrectly included in inventory as 31 December 2020 at R6 500. Assume a tax rate of 30%

Assume that the prior period error effect is considered to be material.

Gamma Ltd.s accounting records are as follows:

2021 2020

Sales 208 000 147 000

Cost of sales (173 500) (107 000)

Profit before tax 35 000 40 000

Taxation (10 500) (12 000)

Profit 24 500 28 000

The profit for 2021 includes R13 500 for the error made in opening inventory

Additional information:

2020 opening retained earnings was R40 000 and closing retained earnings was R68 000.

Gammas income tax rate was 30% in 2021 as well as in 2020. It had no other income or expenses.

Gamma Ltd has R10 000 of share capital throughout 2020 and 2021, as well as retained earnings.

REQUIRED: Disclose the effect of the error in the financial statements for the year ended 31 December 2021

(15 marks)