The following data are from the 20X1 income statement of the Atiyeh Rug Emporium ($ in thousands):

The ending inventory was overstated by $20,000 because of errors in the physical count. The income tax rate was 40% in 20X1 and 20X2.
1. Which items in the income statement are incorrect and by how much? Use O for overstated, U for understated, and N for not affected. Complete the following tabulation (amounts in thousands):

2. What is the dollar effect of the inventory error on retained earnings at the end of 20X1 and at the end of20X2?

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Sales $1,650 Deduct cost of goods sold 390 820 1,210 370 Beginning inventory Purchases Cost of goods available for sale Deduct: Ending inventory Cost of goods sold Gross profit Other expenses Income before income taxes Income tax expense at 40% Net income 840 810 610 200 80 120 20X1 20X2 0 $20 Beginning inventory Ending inventory Cost of goods sold Gross margin Income before Income taxes Income tax expense Net income