Indigo Tool Company’s December 31 year-end financial statements contained the following errors. December 31, 2020 December...

Indigo Tool Company’s December 31 year-end financial statements contained the following errors.

	December 31, 2020	December 31, 2021
Ending inventory	$10,300 understated	$7,300 overstated
Depreciation expense	$2,500 understated	—

An insurance premium of $63,300 was prepaid in 2020 covering the years 2020, 2021, and 2022. The entire amount was charged to expense in 2020. In addition, on December 31, 2021, fully depreciated machinery was sold for $14,800 cash, but the entry was not recorded until 2022. There were no other errors during 2020 or 2021, and no corrections have been made for any of the errors. (Ignore income tax considerations.)

(a) Compute the total effect of the errors on 2021 net income.

Total effect of errors on net income

$Enter the total effect of errors on net income in dollars

understatedoverstated

(b) Compute the total effect of the errors on the amount of Indigo’s working capital at December 31, 2021.

Total effect on working capital

$Enter the total effect on working capital in dollars

overstatedunderstated

(c) Compute the total effect of the errors on the balance of Indigo’s retained earnings at December 31, 2021.

Total effect on retained earnings

$Enter the total effect on retained earnings in dollars

overstatedunderstated

Expert Solution

Indigo Tool Company
Part-a : Computation of Effect of Error on 2021 Net income
Particular	Amount
UnderStatement of 2021 Ending Inventory	$10,300.00
OverStatement of 2020 Ending Invenry	$7,300.00
Expensing of Insurance premium in 2020 (63300/3)	$21,100
Less: Failure Record the sale of fully depreciable machine in 2018	-$14,800
Total Effect of Error on the net Income (Overstated)	$23,900

Part-b
Particular	Amount

OverStatement of 2021 Ending Invenry	$7,300
Less: Expensing of Insurance premium in 2020	-$21,100
Less: Failure Record the sale of fully depreciable machine in 2021	-$14,800
Total Effect of Error on Working Capital ( Understate)	-$28,600

Part-c
Particular	Amount
OverStatement of 2021 Ending Inventory	$7,300
Under Statement of Depreciation Expense n 2020	$2,500
Less: Expensing of Insurance premium in 2020	-$21,100
Less: Failure Record the sale of fully depreciable machine in 20210	-$14,800
tal Effect of Error on Retained Earning ( Understate)	-$26,100

ekkarill92 answered 2 years ago

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