(a) Compute the total effect of the errors on 2021 net income.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Teal Tool Company's December 31 year-end financial statements contained the following errors.
Ending inventory
Depreciation expense
December 31, 2020
$10,500 understated
$2,400 understated
Total effect of errors on net income $
An insurance premium of $69,000 was prepaid in 2020 covering the years 2020, 2021, and 2022. The entire amount was charged to
expense in 2020. In addition, on December 31, 2021, fully depreciated machinery was sold for $16,000 cash, but the entry was not
recorded until 2022. There were no other errors during 2020 or 2021, and no corrections have been made for any of the errors.
(Ignore income tax considerations.)
(a) Compute the total effect of the errors on 2021 net income.
Total effect on working capital $
December 31, 2021
understated
overstated
(b) Compute the total effect of the errors on the amount of Teal's working capital at December 31, 2021.
$8,200 overstated
Total effect on retained earnings
(c) Compute the total effect of the errors on the balance of Teal's retained earnings at December 31, 2021.
$
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Step 1: Definition of accounting error:
VIEWStep 2: Requirement a- Determining the impacts of the error in 2021 net income:
VIEWStep 3: Requirement b- Impact of errors on the working capital as of December 31, 2021:
VIEWStep 4: Requirement c- Impact of the errors on the retained earnings on December 31, 2021:
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