Armstrong Inc. is a calendar-year corporation. Its financial statements for the

Question

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

a.) Assume that the 2014 errors were not corrected and that no errors occurred in 2013. By what amount will 2014 income before income taxes be overstated or understated?

b.)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?

Explanation / Answer

Answer to Part (a)

If these error are nit corrected, the income before taxes be overstated by $ 35,000

As, Overstatement of Ending Inventory will affect the gross profit (Increase) by $ 25,000 and then understatement of Depreciation will further increase Net Profit by $ 10,000

Answer to Part (b)

The retained earning for 31.12.2015 will be understated by $ 50,000 (40,000 + 10,000)

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