Error Analysis Emerson Tool Company's December 31 year-end financial statements contained the following errors.
December 31, 2009 December 31, 2010
Ending inventory $9,600 understated $7,100 overstated
Depreciation expense $2,300 understated -
An insurance premium of $60,000 was prepaid in 2009 covering the years 2009, 2010, and 2011. The entire amount was charged to expense in 2009. In addition, on December 31, 2010, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2011. There were no other errors during 2009 or 2010, and no corrections have been made for any of the errors. (Ignore income tax considerations.)
(a) Compute the total effect of the errors on 2010 net income.
(b) Compute the total effect of the errors on the amount of Emerson's working capital at December 31, 2010.
(c) Compute the total effect of the errors on the balance of Emerson's retained earnings at December 31, 2010.