Neilson Tool Corporation's December 31 year-end financial statements contained the following errors:

December 31, 2013 December 31, 2014

Ending inventory.................... $9,600 overstated .................$8,100 understated

Depreciation expense............... $2,300 overstated ..................-

An insurance premium of $66,000 covering the years 2013, 2014, and 2015 was prepaid in 2013, with the entire amount charged to expense that year. In addition, on December 31, 2014, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2015. There were no other errors during 2013 or 2014, and no corrections have been made for any of the errors. Neilson follows ASPE.

Instructions

Answer the following, ignoring income tax considerations.

(a) Calculate the total effect of the errors on 2014 net income.

(b) Calculate the total effect of the errors on the amount of Neilson's working capital at December 31, 2014.

(c) Calculate the total effect of the errors on the balance of Neilson's retained earnings at December 31, 2014.

(d) Assume that the company has retained earnings on January 1, 2013, and 2014, of $1,250,000 and $1,607,000, respectively; net income for 2013 and 2014 of $422,000 and $375,000, respectively; and cash dividends declared for 2013 and 2014 of $65,000 and $45,000, respectively, before adjustment for the above items. Prepare a revised statement of retained earnings for 2013 and 2014.

(e) Outline the accounting treatment required by ASPE in this situation and explain how these requirements help investors.