Error Analysis
Response to the following problem:
Peter Henning Tool Company's December 31 year-end financial statements contained the following errors.
December 31, 2014 December 31, 2015
Ending inventory $9,600 understated $8,100 overstated
Depreciation expense $2,300 understated
An insurance premium of $66,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The entire amount was charged to expense in 2014. In addition, on December 31, 2015, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2016. There were no other errors during 2014 or 2015, and no corrections have been made for any of the errors. (Ignore income tax considerations.)
Instructions
(a) Compute the total effect of the errors on 2015 net income.
(b) Compute the total effect of the errors on the amount of Henning's working capital at December 31, 2015.
(c) Compute the total effect of the errors on the balance of Henning's retained earnings at December 31, 2015.