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Peter Henning tool company's December 31 year-end financial statements contained the following errors. December 31, 2014 Ending Inventory $9,600 Understated Depreciation Expense $2,300 understated December 31, 2015 Ending INventory $8,100 overstated An insurance premium of $66,000 was prepaid in 2014 covering the years 2014, 2015, & 2016. The entire amount was charged to expense in 2014. In addition, on December 31, 2015, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2016. There were no other errors during 2014 or 2015, and no corrections have been made for any of the errors. (Ignore income tax considerations) Instructions a. Compute the total effect of the errors on 2015 net income. b. Compute the total effect of the errors on the amount of Henning's working capital December 31, 2015. c. Compute the total effect of the errors on the balance of Henning's retained earnings at December 31, 2015.

Sagot :

Anthougoidn

Answer:

Peter Henning Tool Company

a. Effect of the errors on 2015 net income:

Net income overstated by $27,000.

b. Effect of the errors on the amount of Henning's working capital December 31, 2015:

Working capital is understated by $6,900

c. Effect of the errors on the balance of Henning's retained earnings at December 31, 2015:

Retained earnings balance overstated by $27,000

Explanation:

a) Data and Calculations:

December 31, 2014 Ending Inventory $9,600 Understated

Depreciation Expense $2,300 understated

December 31, 2015 Ending INventory $8,100 overstated

Insurance premium for 2015 = $22,000 ($66,000/3) understated

Salvage value realized = $15,000 not recorded

Effect of the errors on 2015 net income:

Beginning inventory was understated by $9,600 = net income overstated

Depreciation Expense $2,300 understated  = net income overstated

December 31, 2015 Ending INventory $8,100 overstated = net income overstated

Insurance premium for 2015 = $22,000 ($66,000/3) understated = net income overstated

Salvage value realized = $15,000 not recorded = understated net income

Total overstatement (understatement) of net income = $27,000 ($42,000 - $15,000)

Effect of the errors on the amount of Henning's working capital (wc) December 31, 2015:

December 31, 2015 Ending INventory $8,100 overstated = overstated wc

Salvage value realized = $15,000 cash not recorded = understated wc

Working capital is understated by $6,900 ($15,000 - $8,100)

Effect of the errors on the balance of Henning's retained earnings at December 31, 2015:

Retained earnings overstated by $27,000

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