The draft 20X5 statement of financial position of Vale reported retained earnings of $1,644,900 and net assets of $6,957,300. Following the completion of the draft 20X5 statement of financial position it was discovered that several items of inventory had been measured at selling price at the 20X4 year end. This meant that the carrying amount of opening inventory for 20X5 was overstated by $300,000. The closing inventory had been correctly measured in the draft 20X5 statement of financial position.
If the error is corrected before the 20X5 financial statements are finalised, what amounts will be reported for retained earnings and net assets in the statement of financial position?
Retained earnings
Net assets
A.$1,644,900
B.$1,644,900
C.$1,944,900
D.$1,944,900
$6,657,300
$6,957,300
$6,657,300
$6,957,300
The correct answer is B, Retained earnings $1,644,900 Net assets $6,957,300.
Tutorial note: Closing inventory was correct in the 20X5 draft statement of financial position and therefore net assets remain unchanged at $6,957,300 when the error is corrected.
Opening inventory (last year’s closing inventory) was measured at selling price and therefore overstated. Opening retained earnings will be reduced by $300,000 to correct the error but profits for 20X5 will be increased by $300,000. Closing retained earnings therefore remains unchanged at $1,644,900.
can you explain why the net assets is unchanged, and also why does the answer for retained earnings is $1,644,900, doesnt the opening inventory overstated thus the correction for it will reduce profit and ultimately reduce the retained earnings? and also why did the profits increased by 300000