UESTION 15

A company overstated its ending inventory in Year 1 by $60,000. The error was not discovered until Year 3. No errors were made in Year 2. After finding the error in Year 3, management provides restated balance sheets for Year 1 and Year 2 by reducing the reported ending inventory in both Year 1 and Year 2 by $60,000. Which of the following statements is correct for Year 2?

The amount reported for inventory in Year 2 needs to be increased by $60,000, and the amount reported for retained earnings in Year 2 needs to be decreased by $60,000. The amounts reported for both inventory and retained earnings in Year 2 should instead be increased by $60,000. Only the amount reported for retained earnings in Year 2 needs to be decreased by $60,000. No adjustments to the amounts reported for inventory or retained earnings are needed in Year 2