Thread: Help with Error Analysis Question

Peter Henning Tool Company's December 31 year-end financial statements contained the following errors.

December 31, 2007 December 31, 2008
Ending Inventory $9,600 understated $8,200 overstated
Depreciation Expense $2,600 understated

An insurance premium of $66,000 was prepaid in 2007 covering the years 2007, 2008, and 2009. The entire amount was charged to expense in 2007. In addition, on December 31, 2008, fully depreciated machinery was sold for $17,000 cash, but the entry was not recorded until 2009. There were no other errors during 2007 or 2008, and no corrections have been made for any of the errors. (Ignore income tax considerations.)

(a) Compute the total effect of the errors on 2008 net income.



(b) Compute the total effect of the errors on the amount of Henning's working capital at December 31, 2008.



(c) Compute the total effect of the errors on the balance of Henning's retained earnings at December 31, 2008.





I know that net income will be overstated, working capital will be understated, and that retained earnings will also be understated but I can't get my calculations to work out. Can someone please help Me??

That's ok. Figured it out.

Thanks anyway.