Windsor Enterprises reported cost of goods sold for 2020 of $1,298,600 and retained earnings of $4,941,400 at December 31, 2020. Windsor later discovered that its ending inventories at December 31, 2019 and 2020, were overstated by $119,050 and $32,440, respectively. Determine the corrected amounts for 2020 cost of goods sold and December 31, 2020, retained earnings. Corrected cost of goods sold $enter a dollar amount Corrected 12/31/20 retained earnings $enter a dollar amount

a) The Corrected Cost of Goods Sold is $1,298,600 + $32,440 - $119,050 = $1,211,990.

This means that the Cost of Goods Sold in the current period is overstated by $86,610 i.e. the difference between $119,050 and $32,440.

b) The Corrected 12/31/20 Retained Earnings is $5,028,010.  This amount is obtained by adding back the amount by which Cost of Goods Sold is overstated, i.e. $86,610 to the stated Retained Earnings balance.

Explanation:

Cost of goods sold is derived by adding opening inventory to purchases and deducting the closing inventory.

When closing inventory figures of December 31, 2019 and 2020 are overstated, the cost of goods sold for 2020 will be affected in two opposite ways.  One, when the opening inventory is overstated, it increases the cost of goods sold.  Two, when the closing inventory is overstated, the cost of goods sold for the current period is reduced.

These overstatements also affect the reported net income.  One, overstated opening inventory reduces net income as it increases the cost of goods sold.  Two, overstated closing inventory increases net income as it reduces the cost of goods sold for the period.

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