Sheridan Tool Company’s December 31 year-end financial statements contained the following errors. December 31, 2020 December 31, 2021 Ending inventory $9,600 understated $7,600 overstated Depreciation expense $2,100 understated — An insurance premium of $62,100 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 $
Sheridan Tool Company’s December 31 year-end financial statements contained the following errors.
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December 31, 2020
|
December 31, 2021
|
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|---|---|---|---|---|
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Ending inventory
|
$9,600 understated | $7,600 overstated | ||
|
Depreciation expense
|
$2,100 understated | — |
An insurance premium of $62,100 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
(a) Compute the total effect of the errors on 2021 net income.
| Total effect of errors on net income | $Enter the total effect of errors on net income in dollars |
(b) Compute the total effect of the errors on the amount of Sheridan’s
| Total effect on working capital | $Enter the total effect on working capital in dollars |
(c) Compute the total effect of the errors on the balance of Sheridan’s
| Total effect on retained earnings | $Enter the total effect on retained earnings in dollars |
Solutions:
| A)Total Effect of errors on 2021 Net income | |
| Understatement of 2020 ending inventory (Income Overstated) | 9600 |
| Overstatement of 2021 ending inventory (Income overstated) | 7600 |
| Expensing of insurance premium in 2020 (62,100/3) (Income Overstated) | 20700 |
| Failure to record the sale of fully depreciated machine in 2021 (Understated By gain) | -16,300 |
| Total effects of error on the net income (overstated) | 21,600 |
| B)Total effects of errors on 2021 working capital | |
| overstatement of 2021 ending inventory (WC Overstated) | 7,600 |
| Expensing of insurance premium in 2020 (WC Understated) | -20,700 |
| Failure to record the sale of fully depreciated machine in 2021 (WC Understated by cash) | -16,300 |
| Total effect on working capital(understated) | -29,400 |
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