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Topic
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Tack, Inc. reported a retained earnings balance of $150,000 at December 31, Year 1. In June Year 2, Tack discovered that merchandised costing $40,000 had not been included in inventory in its Year 1 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjustment beginning retained earnings in its statement of retain earning at December 31, Year 2?
a. 190,000
b. 178,000
c. 150,000
d. 122,000
The answer is B and I don’t get why. I thought if you forget to include inventory cost in your financial statement, it would cause your cost of goods sold to be understated and in turn it would cause your income statement to be overstated.To correct the overstatement of prior period net income, beginning retained earnings must be decreased on an after-tax basis for the amount of ending inventory. As a result, the answer should be D??
For example:
IF RECORDED:
Beginning Inventory: 0
+Purchases: 40,000 ( if recorded)
Cost of goods Available for sale: 40,000
– Ending Inventory: 0
COGS = 40,000
IF HAVE NOT BEEN RECORDED
Beginning Inventory: 0
+Purchases: 0 (purchased 40k but did not record)
Cost of goods Available for sale: 0
– Ending Inventory: 0
COGS = 0
The example above mean that if you forget to record inventory, your cogs will be understated. Please help?
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