Marigold Tool Company’s December 31 year-end financial statements contained the
ID: 2555613 • Letter: M
Question
Marigold Tool Company’s December 31 year-end financial statements contained the following errors.
December 31, 2017
December 31, 2018
An insurance premium of $67,200 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 $13,700 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.
(b) Compute the total effect of the errors on the amount of Marigold’s working capital at December 31, 2018.
(c) Compute the total effect of the errors on the balance of Marigold’s retained earnings at December 31, 2018.
December 31, 2017
December 31, 2018
Ending inventory $9,100 understated $7,800 overstated Depreciation expense $2,300 understated —Explanation / Answer
a) Computation of Effect of the error on 2018 net income Particular Amount Understatement of 2017 inventory $9,100 Overstatement of 2018 ending Inventory $7,800 Expensing of Insurance premuim in 2017($67200/3) $22,400 Failure to Record the sale of fully depreciated machine in 2018 -$13,700 Total Effect of Error on the net income( Overstated) $25,600 b) Computation of Total Effect of error on working capital at 31 Dec 2018 Particular Amount Overstatement of 2018 ending Inventory $7,800 Expensing of Insurance premuim in 2017($67200/3) -$22,400 Failure to Record the sale of fully depreciated machine in 2018 -$13,700 Total Effect of Error on Working Capital( Underrstated) -$28,300 c) Computation of Effect of the error on retained Earning at Dec 31,2018 Particular Amount Overstatement of 2018 ending Inventory $7,800 Understatement of Depreciation Expense in 2017 $2,300 Expensing of Insurance premuim in 2017($67200/3) -$22,400 Failure to Record the sale of fully depreciated machine in 2018 -$13,700 Total Effect of Error on Retained Earning( understated) -$26,000
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