Practice
Check your answer
Write your response and explain your reasoning.
Trace two errors. Year 1 ending inventory is overstated $50,000, and the next ending inventory is correct. A separate $120,000 expenditure was improperly capitalized in Year 1 and depreciated $30,000 in Years 2 and 3. Show each period, ending balance, correction, and why cumulative reversal is not harmless.
Compare your reasoning with the worked answer
The inventory error has +$50,000 and -$50,000 pretax income effects but is not harmless. The capitalized error leaves a $60,000 asset overstatement after two $30,000 depreciation charges.