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Hello.
I am having difficulty understanding this question of prior period error. Please help me understand it.[Starting question here]
During 20X1 a company discovered that certain items had been included in inventory at 31 Dec 20X0 at a value of $2.5m but they had in fact sold before the year-end.
Figures reported for the year-ending 31 Dec 20X0 are given below:
Sales : 48300
COGS : 30200
Gross Profit : 18100
Tax : 4300
Net profit : 13800Figures reported for the current year-ending 31 Dec 20X1 are given below
Sales : 52100
COGS : 33500
Gross Profit : 18600
Tax : 4600
Net profit : 14000The cost of goods sold in 20X1 includes the $2.5m error in opening inventory. The retained earning at 1 Jan 20X0 were $11.2m.
Required: Show the SOPL & Statement of changes in equity for both years.
[End of question]
Now here what I do.
1) Adjust the prior period error retrospectively in the current year’s statement of changes in equity by deducting it from the retained earning
2) Inventory should be lowered as according to the prior period error figure have impact on inventoryNow I’m stuck here as I don’t know what else to do? Please correct me!
Thank you!
Hi,
You have corrected the error and would then account for the current year’s inventory as normal, lower of cost and NRV.
Thanks
Is this true when correcting the error in the current year that Retained earning will be decreased while cost of sales will also be decreased due to reduction in inventory such as this entry:
DR Retained Earnings
CR InventoryBut why the Cost of good sold is decreased in the current year and increased in the prior year? Is it because of the question’s requirement which has nothing with the correction of prior period error.
If cost of sales decrease then profits will go up as we are reducing our costs. It therefore stands that the retained earning will increase by the same amount.
If the error last year was to record the closing inventory at the $2.5 million in 20X0 then we need to update that years figure by increasing the cost of sales as the inventory was not in stock and should not have been recorded. We would have recorded it by DR Inventory (SFP) CR Closing inventory (C’o’S – SPL) so we need to reverse it thus debiting cost of sales which is an increase in he expense.
Correcting it this year, as the closing inventory figure will become this year’s opening figure, then we need to remove the figure from opening inventory. Opening inventory is a debit balance and so to reduce it this would be a credit entry, reducing the cost of sales and in doing so this is will increase the profit.
Hope that helps.
Thanks
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