Error correction; inventory error
Response to the following problem:
During 2016, WMC Corporation discovered that its ending inventories reported in its financial statements were misstated by the following material amounts:
2014 Understated by $120,000
2015 overstated by 150,000
WMC uses a periodic inventory system and the FIFO cost method.
Required:
1. Determine the effect of these errors on retained earnings at January 1, 2016, before any adjustments. Explain your answer. (Ignore income taxes.)
2. Prepare a journal entry to correct the errors.
3. What other step(s) would be taken in connection with the correction of the errors?