Black, Inc. is a calendar-year corporation whose financial statements for 2014 and 2015 included errors as follows: PHOTO Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2014, or at December 31, 2015. Ignoring income taxes, by how much should Black's retained earnings be retroactively adjusted at January 1, 2016?
a. $154,000 increase
b. $46,000 increase
c. $19,000 decrease
d. $8,000 increase

a. $154,000 increase

Explanation:

An overstated closing inventory overstates Income as it understates Cost of Goods sold.

An overstated Depreciation understates Income as it overstates expenses.

2014 Income Overstatement (understatement) = 162,000 - 135,000

= $27,000

Net income overstated by $27,000 in 2014

An understated closing inventory understates Income as it overstates Cost of Goods sold.

An understated Depreciation overstates Income as it understates expenses.

2015 income overstatement (understatement) = 45,000 - 64,000

= -$19,000

Income understated in 2015 by $19,000

2015 Beginning inventory was $162,000 overstated which means income was understated by $162,000 in 2015.

Income should therefore be increased (decreased): Understatements - Overstatements

= 162,000 + 19,000 - 27,000

= $154,000

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