Question

BACK CALCULATOR PRINTER VERSION NEX Exercise 22-18 Sunland Tool Company's December 31 year-end financial statements contained the following enrrors December 31, 2017 December 31, 2018 Ending inventory $9,000 understated $8,000 overstated Depreciation expense $2,300 understated An Insurance premlum of $69,600 was prepaid in 2017 covering the years 2017, 2018, and 2019, The entire amount was charged to expense in 2017. In addition, on December 31, 2018, fully depreciated machinery was sold for $15,900 cash, but the ently was not recorded until 2019. There were no other errors during 2017 or 2018, and no corections have been made for any of the errors. (Ignore income tax considerations.) (Enter negative amounts using elther a negative sign preceding the number e.g. -15,000 or parentheses e.g. (15,000),) (a) Compute the total effect of the errors on 2018 net income. Total effect of errors on net income (b) Compute the total effect of the errors on the amount of Sunland's working capital at December 31, 2018 Total effect on working capital (c) Compute the total effect of the erors on the balance of Sunland's retained earnings at December 31, 2018) Total effect on retained earnings UNK TO TEXT UNK TO TEY

Answer 1

Solution
Impact on net income of 2018	2018
Overstatement of ending inventory	-8000	Overstatement of ending inventory would have resulted into higher gross earning
Insurance expenses	-23033	Pro rata expense of 1/3 should have been charged in 2018
Profit on sale of machine	15900	As the machine was fully depreciated it was a gain in 2018 and should have been recorded though it is non operating income
Total Impact	-15133	Net income of 2018 should be reduced by this amount
Effect of errors on working capital at 31st December 2018
	2018
Overstatement of ending inventory	-8000	As the closing inventory would reduce and so the working capital because it is current assets- current liabilities
Insurance expenses	23033.3	This will be recorded a prepaid expense in 2018 and would increase current assets and so the working capital
Sale of machine	15900	This should have increased the cash balance in 2018 and therefore the working capital too
Total effect	30933.3	Working capital would increase by this amount
Effect of retained earning as at 31st December 2018
	2018
Overstatement of ending inventory	-8000	As the profit would reduce and hence the retained earning
Insurance expenses	23033.3	retained earning would increase because this portion will be prepaid expense as opposed to full expenses off in 2017
Sale of machine	15900	This increase the retained earning of 2018 as it was sold in 2018 only
Total effect	30933.3	Retained earning would increase
Notes:
It is assumed the overstatement of ending inventory and depreciation expense in 2018 are after considering the impact of 2017