Question

Langley Company's December 31 year-end financial statements contained the following errors:

Dec. 31, 2017

Dec. 31, 2018

Ending inventory

$37,500 understated

$55,000 overstated

Depreciation expense

10,000 understated

An insurance premium of $90,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2018, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2019. There were no other errors during 2018 or 2019 and no corrections have been made for any of the errors. Ignore income tax considerations.

Reference: Ref 22-5

What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2018?

	A.	Retained earnings understated by $22,500
	B.	Retained earnings understated by $12,500
	C.	Retained earnings understated by $50,000
	D.	Retained earnings overstated by $17,500

Answer 1

Understatement of ending inventory of Dec 2017	-$37,500
Overstatement of ending inventory of Dec 2018	$55,000
Overstatement of Insurance premium	-$30,000
Understatement on Net Income/Retained earnings	-$12,500
So Option B is answer