Peter Henning Tool Company’s December 31 year-end financial statements contained
ID: 2472877 • Letter: P
Question
Peter Henning Tool Company’s December 31 year-end financial statements contained the following errors.
December 31, 2014
December 31, 2015
An insurance premium of $51,390 was prepaid in 2014 covering the years 2014, 2015, and 2016. The entire amount was charged to expense in 2014. In addition, on December 31, 2015, fully depreciated machinery was sold for $12,490 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.) (Enter negative amounts using either a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000).)
(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 at December 31, 2015.
(c) Compute the total effect of the errors on the balance of Henning’s retained earnings at December 31, 2015.
December 31, 2014
December 31, 2015
Ending inventory $9,052 understated $7,198 overstated Depreciation expense $2,242 understatedExplanation / Answer
a. Total effect of errors on net income of 2015 = -(51390/3)+12490-7198+9052-2242 = (5028)$
b. Effect on working capital = 9052-7198+(51390/3) = 18984$
C.effect on retained earnings as on 2015 = 12490-7198+(51390/3) = 22422$ understatement to be rectified.
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