Langley Company's December 31 year-end financial statements contained the following errors: Dec. 31, 2017 Dec. 31,...

Langley Company's December 31 year-end financial statements contained the following errors:

Dec. 31, 2017 Dec. 31, 2018

Ending inventory $27,500 understated $35,000 overstated

Depreciation expense 10,000 overstated

An insurance premium of $290,000 was prepaid in 2017 covering the years 2017, 2018, and 2019. The prepayment was correctly recorded with a debit to prepaid insurance. However, the prepaid insurance account at December 31, 2018 had a balance of $290,000.

(a) What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2018?

(b)What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2018?

Expert Solution

(a)	Calculation of total net effect of the errors on the amount of Langley's working capital

	Ending inventory (overstated)	$35,000
	Insurance premium prepaid at 31st Dec, 2018 (290,000 x 2/3) (overstated)	$193,333
	Net effect (Overstated)	$228,333


	Note:
1	Inventory is not a running account and hence no effect of understated ending
	inventory on 31/12/2017.
2	Depreciation has no effect on working capital
3	At the end of year 2018, prepaid insurance premium was only for 2019 and
	therefore prepaid amount is $96,667.

(b)	Calculation of total net effect of the errors on the amount of Langley's working capital

	Depreciation (overstated)	$10,000
	Ending inventory (overstated)	$35,000
	Insurance expenses at 31st Dec, 2018 (290,000 x 2/3) (understated)	$193,333
	Net effect (understated)	$148,333


1	Note:
	Opening Inventory i.e. inventory of Dec 31, 2017 have net effect zero on retained earning

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