Question

Assume that no correcting entries were made at 12/31/14, or 12/31/15. Ignoring income taxes, by how much will retained earnings at 12/31/15 be overstated or understated?
a. $40,000 overstatement
b. $35,000 overstatement
c. $50,000 understatement
d. $15,000 understatement

Answer 1

Use the following information for questions 55 and 56.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/14 and 12/31/15 contained the following errors:

2014 2015

Ending inventory $25,000 overstatement $40,000 understatement

Depreciation expense 10,000 understatement 20,000 overstatement

Answer:

By $50,000 retained earnings at 12/31/15 is understated

Option c, $50,000 understatement

Explanation:

Given:

Ending inventory $25,000 overstatement $40,000 understatement

Depreciation expense 10,000 understatement 20,000 overstatement

To find:

The retained earnings amount to be overstated or understated at 12/31/15

When an amount is understated, it depicts the following two things,

• The amount is not the correct amount
• The amount is less than the true amount

Here, the reatianed earnings amount can be evaluated by the following step,

$\ 40,000 + \ 10,000 = \ 50,000 \text{ understatement }$

So, it can be finalised that the retained earnings of $50,000 is understated.