Windows World uses the lower-of-cost-or-net realizable value method on an individual item basis. Its first year of operation is 2019. The inventory at December 31, 2019 included product X. Relevant per unit data for product X appears below:

Estimated selling price: $25; Cost: $15; Estimated cost of completion & disposal: $5

There were 100 units of product X in the inventory on December 31, 2019. Product X was incorrectly valued at $20 per unit for GAAP reporting purposes. The tax return is not affected by this book error. All 100 units were sold in February 2020.

REQUIRED: Answer the following questions by filling in the blanks.

PART I: Assume the error was never discovered. Ignore taxes for this part. Compute the effect of this error on: Net Income for 2019 and 2020, and Retained Earnings ending 12/31/2020. Books are closed for both 2019 and 2020.

2019 Net Income Was Understated or Overstated ________? by $__________ .

2020 Net Income Was Understated or Overstated_________ ? by $ ____________ .

Retained Earnings as of 12/31/2020 is affected by $ .________

PART II: Now assume a tax rate of 20%. Different from Part I, further assume the error was discovered in May 2020, before 2020 books are closed. The journal entry in May 2020 to correct for this error includes the following:

Debit or Credit? DTL or DTA or ITP? by $ _______.

Debit or Credit? Retained Earnings by $ __________.