Exercise 22-18 Bonita Tool Company\'s December 31 year-end financial statements

Question

Exercise 22-18 Bonita Tool Company's December 31 year-end financial statements contained the following errors. December 31, 2017 $9,400 understated $2,200 understated December 31, 2018 Ending inventory Depreciation expense $7,900 overstated An insurance premium of $64,800 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017. In addition, on December 31, 2018, fully depreciated machinery was sold for $16,300 cash, but the entry was not recorded until 2019. There were no other errors during 2017 or 2018, 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 2018 net income. Total effect of errors on net income s (b) Compute the total effect of the errors on the amount of Bonita's working capital at December 31, 2018 Total effect on working capital (c) Compute the total effect of the errors on the balance of Bonita's retained earnings at December 31, 2018. Total effect on retained earnings

Explanation / Answer

a) Computation of effect of the error on 2018 net income is shown below Particular Amount Understatement of 2017 ending Inventory $9,400 Overstatement of 2018 ending Inventory $7,900 Expensing of Insurance premium in 2017 ($64800/3) $21,600 Failure to Record the sale of fully Depreciated Machine in 2018 -$16,300 Total effect on error on the net income (Overstated) $22,600 b. Computation of effect of the error on the Working Capital at Dec 2018 Particular Amount Overstatement of 2018 ending Inventory $7,900 Expensing of insurance premium in 2017 -$21,600 Failure to Record the sale of fully Depreciated Machine in 2018 -$16,300 Total Effect of the errors on Working Capital ( understated) -$30,000 C. Computation of effect of the error on the Retained Earning at Dec 2018 Particular Amount Overstatement of 2018 ending Inventory $7,900 Understatement of Depreciation expense in 2017 $2,200 Expensing of insurance premium in 2017 -$21,600 Failure to Record the sale of fully Depreciated Machine in 2018 -$16,300 Total Effect of the errors on retained Earning ( understated) -$27,800

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