Question

Exercise 22-18 Your answer is incorrect. Try again. Kingbird Tool Company's December 31 year-end financial statements contained the following errors December 31, 2017 December 31, 2018 Ending inventory $10,300 understated $7,300 overstated Depreciation expense $2,500 understated An insurance premium of $63,300 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 $14,800 cash, but the entry was not recorded until 2019. There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. (Ignore income tax considerations.) (Enter negative amounts using either 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 18,625 (b) Compute the total effect of the errors on the amount of Kingbird's working capital at December 31, 2018 Total effect on working capital -23,325 (c) Compute the total effect of the errors on the balance of Kingbird's retained earnings at December 31, 2018. Total effect on retained earnings -20,825

Answer 1

a)

Effect on Net Income	Amount
Ending Inventory overstated	$      7,300
Beginning inventory understated	$   10,300
Insurance Expenses ($63300/3years)*1year	$   21,100
Gain on Sale of machine	$ (14,800)
Net Income overstated	$   23,900

b)

Effect on Working Capital	Amount
Ending Inventory overstated	$      7,300
Cash not recorded on sale of Machine	$ (14,800)
Insurance Expenses ($63300/3years)*1year	$ (21,100)
Working Capital understated	$ (28,600)

c)

Effect on Retained Earnings	Amount
Beginning inventory understated	$ (10,300)
Depreciation understated	$      2,500
Insurance Expenses ($63300-$21100)	$ (42,200)
Net Income understated	$ (50,000)
Net Income overstated	$   23,900
Retained Earnings Understated for 2018	$ (26,100)