In January, X Company, a merchandiser, purchased inventory on account. The accou

Question

In January, X Company, a merchandiser, purchased inventory on account. The accountant incorrectly recorded the transaction as an increase in Inventories and a decrease in Retained Earnings. As a result, which of the following is true regarding the January financial statements? Profit was understated. Inventories were understated. Retained Earnings was overstated. Revenue was understated. Accounts Payable was overstated. Accounts Receivable was overstated. X Company has several insurance policies covering different periods. On the Balance Sheet, Prepaid Insurance at the beginning of the period was $22,928; Prepaid Insurance at the end of the period was $24,973. On the Income Statement, Insurance Expense was $31,432. Insurance permium during the period were $29,626 $33,477 $37,829 $42,747 $48,304 $54,583 X Company is a merchandiser. On December 15, 2015 it sold a particular item to a customer for $2,000. The item had cost X Company $760. The customer paid cash of $400 and promised to pay the remainder the following month. The revenue and expense entries to record this sale would result in a net increase in Retained Earnings of $400 $760 $1,240 $1,600 $2,000 $2,400

Explanation / Answer

1) Retained earnings are overstated

2) Insurance prewmium paid = Insurance expense + Closing insurance prepaid- Opening insurance prepaid

= 31432+24973-22928

= 33477

3) Increase in retained earnings = 2000-760 i.e 1240

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