Answer:
Peter Henning Tool Company
a. Effect of the errors on 2015 net income:
Net income overstated by $27,000.
b. Effect of the errors on the amount of Henning's working capital December 31, 2015:
Working capital is understated by $6,900
c. Effect of the errors on the balance of Henning's retained earnings at December 31, 2015:
Retained earnings balance overstated by $27,000
Explanation:
a) Data and Calculations:
December 31, 2014 Ending Inventory $9,600 Understated
Depreciation Expense $2,300 understated
December 31, 2015 Ending INventory $8,100 overstated
Insurance premium for 2015 = $22,000 ($66,000/3) understated
Salvage value realized = $15,000 not recorded
Effect of the errors on 2015 net income:
Beginning inventory was understated by $9,600 = net income overstated
Depreciation Expense $2,300 understated = net income overstated
December 31, 2015 Ending INventory $8,100 overstated = net income overstated
Insurance premium for 2015 = $22,000 ($66,000/3) understated = net income overstated
Salvage value realized = $15,000 not recorded = understated net income
Total overstatement (understatement) of net income = $27,000 ($42,000 - $15,000)
Effect of the errors on the amount of Henning's working capital (wc) December 31, 2015:
December 31, 2015 Ending INventory $8,100 overstated = overstated wc
Salvage value realized = $15,000 cash not recorded = understated wc
Working capital is understated by $6,900 ($15,000 - $8,100)
Effect of the errors on the balance of Henning's retained earnings at December 31, 2015:
Retained earnings overstated by $27,000
