Question

Exercise 22-18 Monty Tool Company's December 31 year-end financial statements contained the following errors. December 31, 2017 $9,400 understated $2,200 understated December 31, 2018 $7,900 overstated Ending inventory Depreciation expense An insurance premium of $64,800 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 $16,300 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 (b) Compute the total effect of the errors on the amount of Monty's working capital at December 31, 2018. Total effect on working capital (c) Compute the total effect of the errors on the balance of Monty's retained earnings at December 31, 2018. Total effect on retained earnings

Answer 1

Solution:

a)

Total effect of the errors on 2018 net income= opening stock 12/31/2017 + ending stock 12/31/2018 (overstated) + prepaid insurance for 2017 a (64,800 / 3years ) - cash sales (not recorded)

=$9,400 +$7,900+$21,600 -$16,300

=$22,600 overstated.

b)

Total effect of the errors on the amount of Monty's working capital at December 31,2018= ending stock 12/31/2018 (overstated) -Total insurance expense + prepaid insurance for 2017 and 2018(64,800 / 3years * 2 years) - cash sales (not recorded)

=$7,900-$64,800+$43,200-$16,300

=($30,000) understated

c)

Total effect of the errors on the balance of Monty's retained earnings at December 31,2018(64,800 / 3years * 2 years) - cash sales (not recorded)

=$7,900+$2,200-$64,800+$43,200 -$16,300

=($27,800) understated

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