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In: Accounting

Accounting Errors Shannon Corporation began operations on January 1, 2016. Financial statements for the years ended...

Accounting Errors

Shannon Corporation began operations on January 1, 2016. Financial statements for the years ended December 31, 2016 and 2017, contained the following errors:

December 31
2016 2017
Ending inventory $16,000 $15,000
  understated   overstated
Insurance expense $10,000 $10,000
  overstated   understated
Prepaid insurance $10,000 —
  understated

In addition, on December 31, 2017, fully depreciated machinery was sold for $10,800 cash, but the sale was not recorded until 2018. There were no other errors during 2016 or 2017, and no corrections have been made for any of the errors.

Ignoring income taxes, what is the total effect of the errors on 2017 net income?

a.Net income overstated by $5,800

b.Net income overstated by $11,000

c.Net income overstated by $14,200

d.Net income understated by $1,800

Solutions

Expert Solution

The correct answer is

a) Net income overstated by $ 14200

Calculations

Effect of errors on 2017 net income

= overstated ending inventory + understated insurance expense - understated income on sale of machinery

= 15000 + 10000 -10800

= $ 14200 Overstated.

Thus the correct answer is $ 14200 overstated..

ekkarill92 answered 2 years ago
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