Pharoah Co. began operations on January 1, 2017. Financial statements for 2017 a

ID: 2530762 • Letter: P

Question

Pharoah Co. began operations on January 1, 2017. Financial statements for 2017 and 2018 contained the following errors:

In addition, on December 31, 2018 fully depreciated equipment was sold for $47200, but the sale was not recorded until 2019. No corrections have been made for any of the errors. Ignore income tax considerations.

The total effect of the errors on the amount of Pharoah's working capital at December 31, 2018 is understated by

Dec. 31, 2017 Dec. 31, 2018 Ending inventory $218000 overstated $239000 understated Depreciation expense 130000 overstated - Insurance expense 94000 understated 94000 overstated Prepaid insurance 94000 overstated -

Explanation / Answer

2018 Ending Inventory

$239000(U)

Add: Depreciation Expense

130000(U)

Less: Insurance Expense

94000(O)

Add: Insurance Expense

94000(U)

Add: Unrecorded Gain

47200(U)

Overstatement of 2018 Income

$416200(U)