Indigo Suppliers reported cost of goods sold for 2017 of $840,000 and retained earnings of $1,605,000 at December 31, 2017. Indigo later discovered that its ending inventories at December 31, 2016 and 2017, were overstated by $39,000 and $63,000, respectively. Determine the corrected amounts for 2017 cost of goods sold and December 31, 2017, retained earnings.

COGS = $816000

RE = $1542000

explanation:

Getting Corrected Cost of Goods Sold,(COGS.)

equals the sum and substract of inventory, purchases and ending inventory:

COGS = BeginningInventory + Purchases - EndingInventory

COGS = BI + P - EI

The BI given is $840,000. purchases is not available

The EI equals difference between $39000 and $63000

63000 - 39000= $24000

corrected amounts of COGS is

COGS = 840000- 24000 = $816000

the retained earnings can be calculated by

substraction of the value of the retained earning from ending inventory by the end of 2017,

$63000,

RE = 1605000 - 63000 = $1542000

Cost of Goods sold = $864000

retained earnings = $1581000

Explanation:

The cost of goods sold is the dollar cost of the inventory that is sold during the period. It is calculated as follows:

Cost of Goods sold = Opening Inventory + Purchases - Closing Inventory

The overstatement of opening inventory causes the cost of goods sold to rise or be overstated as the opening inventory is added when we are calculating the cost of goods sold. An overstatement of cost of goods sold reduces the Net Income and thus reduces the retained earnings which is made up of the Net Income retained in the business.

The overstatement of closing inventory reduces the cost of goods sold or causes it to be understated as it is subtracted when calculating the cost of goods sold. An understatement of cost of goods sold causes the Net Income to be overstated and thus increases the retained earnings.

31 December 2017

Corrected cost of goods sold = 840000 - 39000 + 63000  = $864000

The cost of goods sold were understated by = 864000 - 840000 = $24000

Corrected Retained earnings = $1605000 - 24000  =  $1581000

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