Question
In: Accounting
Straightarm Inc. is a calendar-year corporation. Its financialstatements for the years ended 12/31/24 and 12/31/25...
Straightarm Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/24 and 12/31/25 contained the following errors:
2024 | 2025 | |
Ending inventory | $15,000 understatement | $24,000 overstatement |
Depreciation expense | $6,000 understatement | $12,000 understatement |
Failed to record Unearned Revenue at 12/31/25: $7,000
Straightarm declared a cash dividend of $11,000 on 12/31/25. No journal entry was made in 2025. The dividend was paid on 1/3/26; Straightarm debited Retained Earnings and credited Cash.
12/31/25 Liabilities are in error by:
Select one:
a. $7,000
b. $18,000
c. $11,000
d. $4,000
Solutions
Expert Solution
Liabilities+ equity = assets
2024
Ending inventory understatement 15000
Implies opening inventory of 2025 under stated
Profit over stated
(equity) over stated in 2025. 15000
No effect on liability
Depreciation understatement 6000
Expenses understatement
Profit overstatement
overstated equity 6000
2025
Ending inventory overstatement
Profit understated
equity understatement 24000
Depreciation 12000 understated
Expenses understatement
Profit over overstated
Equity over stated. 12000
Entry for unearned revenue
Revenue a/c Dr 7000
To unearned revenue 7000
Implies revenue over stated
And liability understated
Dividend declared
Dividend a/c Dr 11000
To dividend payable a/c 11000
Understatement of expenses leads to overstatement of profit
Liability understated
Clearly liabilities are affected in last 2 cases only
18000(7000+11000) of liabilities are understated.
ekkarill92 answered 2 years agoRelated Solutions
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