Windsor Tool Company\'s December 31 year-end financial statements contained the

Question

Windsor Tool Company's December 31 year-end financial statements contained the following errors. December 31, 2018 $8,400 overstated December 31, 2017 Ending inventory$10,500 understated Depreciation expense $2,300 understated An insurance premium of $65,700 was prepaid in 2017 covering the years 2017, 2018, and 2019. The entire amount was charged to expense in 2017. In addition, on December 31, 2018, fully depreciated machinery was sold for $16,000 cash, but the entry was not recorded until 2019 . There were no other errors during 2017 or 2018, and no corrections have been made for any of the errors. Ignore income tax considerations.) (Enter negative amounts using either a negative sign preceding the numbere.g. -15,000 or parentheses e.g. (15,000).) (a) Compute the total effect of the errors on 2018 net income. Total effect of errors on net income (b) Compute the total effect of the errors on the amount of Windsor's working capital at December 31, 2018 Total effect on working capital (c) Compute the total effect of the errors on the balance of Windsor's retained earnings at December 31, 2018 Total effect on retained earnings g Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

(a) Total effect of errors on Net Income:

Net Income overstated by $24800

$(10500+8400+(65700/3)-16000)

Note- Impact made on Net Income is always in the opposite direction to the error in beginning inventory, and is always in same direction as the error in ending inventory.

(b)Total effect on working capital:

Working Capital overstated by $39000

$(65700-16000-8400-2300)

(c) Total effect on Retained Earnings:

Retained Earnings understated by ($27200)

$(2300+8400-1600-21900)

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