Question
In: Accounting
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 |
Solutions
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 1 year agoRelated Solutions
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