Langley Company\'s December 31 year-end financial statements contained the follo
ID: 2423842 • Letter: L
Question
Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2014 Dec. 31, 2015 Ending inventory $22,500 understated $33,000 overstated Depreciation expense 6,000 understated An insurance premium of $54,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2015, fully depreciated machinery was sold for $28,500 cash, but the sale was not recorded until 2016. There were no other errors during 2015 or 2016 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total net effect of the errors on Langley's 2015 net income? What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2015? What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2015?
Explanation / Answer
Opening Inventory understated by 22500 , Increased Profit
+22500
Closing Inventory Overstated by 33000, Increased Profit
+33000
Depreciation Expense Understated, reduced Profit
-6000
Prepaid Insurance Premium charged as expense in 2014, increased Profit of 2015
54000/3 = +18000
Profit on Sale of Machinery not Recorded, reduced profit
-28500
Effect on Net Income
+39000
Net Income increased by 39000 than what should It actually have been.
Effect on Working Capital: Working caoital = Current Assets- Current Liabilities
Opening Inventory understated by 22500
-
Closing Inventory Overstated by 33000
+33000
Depreciation Expense Understated
-
Prepaid Insurance Premium charged as expensein 2014
-18000
Profit on Sale of Machinery not Recorded
-
Effect on Working capital
+15000
Working Capital Increased by 15000
Effect on Retained Earnings = Effect on Profit – Effect on Working capital
=39000-15000 =24000
Retained Earnings increased by 24000
Opening Inventory understated by 22500 , Increased Profit
+22500
Closing Inventory Overstated by 33000, Increased Profit
+33000
Depreciation Expense Understated, reduced Profit
-6000
Prepaid Insurance Premium charged as expense in 2014, increased Profit of 2015
54000/3 = +18000
Profit on Sale of Machinery not Recorded, reduced profit
-28500
Effect on Net Income
+39000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.