In reviewing the accounts in 2009 after the books for the prior year have been c

Question

In reviewing the accounts in 2009 after the books for the prior year have been closed, you find that the following errors have been made: $126,000 $19,500 $6,000 In 2007 the ending inventory was understated by In 2007 the company failed to accrue rent expense of In 2008 the company failed to accrue insurance expense of REQUIRED: Ignoring taxes, determine what amount, if any, net income and retained earning would be over or under stated in 2007 and 2008 as a result of these errors. Show your calculations and clearly label your answers.

Explanation / Answer

Net Income Retained Earnings 2007 2008 2007 2008 Ending Inventory Under Stated + $126,000 $126,000 Failiure to Accrue rent Expenses + $19,500 $19,500 Failiure to Accrue Insurance Expenses + $6,000 $6,000 $145,500 $6,000 $145,500 $6,000 The Under Statement of Inventory will increase the Income and retained Earnings by $126000 The Failiure to Accrue Rent expenses will overstate the Income of 2007 and the actual debit of this expenses will Understate the Income of 2008 The Failiure to AccrueInsurance expenses will overstate the Income of 2008 and the actual debit of this expenses will Understate the Income of 2009 The failiure to record the Acrued expenses will counter balanced in the next year when it booked directly to Expenses concerned

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