Use the following information for the following questions:
Ignore taxes.
Peach Inc.'s financial statements for the years 2019 and 2020 contained errors as follows:
$\begin{array}{c}
\begin{array}{lll}
\
\text {Ending inventory}\
\text { Depreciation Expense}
\end{array}
\begin{array}{c}
\underline{2019}\
\text {\$ 3,000 \quad understated}\
\text {5,500 \quad overstated }
\end{array}
\begin{array}{c}
\underline{2020}\
\text { \$ 5,000 \quad overstated}\
\text {3,500 \quad overstated}
\end{array}
\end{array}$

-Assuming that none of the errors were detected or corrected, by what amount will retained earnings at December 31, 2020 be overstated or understated?
A) $4,000 understated
B) $5,000 overstated
C) $8,500 understated
D) $11,500 understated

Question

Use the following information for the following questions: 
Ignore taxes.
Peach Inc.'s financial statements for the years 2019 and 2020 contained errors as follows:
$\begin{array}{c}
\begin{array}{lll}
\
\text {Ending inventory}\
\text { Depreciation Expense}
\end{array}
\begin{array}{c}
\underline{2019}\
\text {\$ 3,000 \quad understated}\
\text {5,500 \quad overstated  }
\end{array}
\begin{array}{c}
\underline{2020}\
\text { \$ 5,000  \quad overstated}\
\text {3,500 \quad  overstated}
\end{array}
\end{array}$

-Assuming that none of the errors were detected or corrected, by what amount will retained earnings at December 31, 2020 be overstated or understated?
A) $4,000 understated
B) $5,000 overstated
C) $8,500 understated
D) $11,500 understated

Quizplus · Accepted Answer

The 2019 ending inventory error ($3,000 understated) causes 2019 COGS to be overstated, reducing 2019 net income and retained earnings by $3,000. The 2020 ending inventory error ($5,000 overstated) causes 2020 COGS to be understated, increasing 2020 net income and retained earnings by $5,000. The depreciation errors reduce 2019 net income by $5,500 and 2020 net income by $3,500. The net effect on retained earnings is $3,000 (2019 inventory) + $5,500 (2019 depreciation) - $5,000 (2020 inventory) + $3,500 (2020 depreciation) = $4,000 understated.

Use the Following Information for the Following Questions: Ignore

Use the Following Information for the Following Questions:
Ignore