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

An insurance premium of $66,000 covering the years 2016, 2017, and 2018 was prepaid in 2016, with the entire amount charged to expense that year. In addition, on December 31, 2017, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2018. There were no other errors during 2016 or 2017, 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 2017 net income.
(b) Calculate the total effect of the errors on the amount of Neilson's working capital at December 31, 2017.
(c) Calculate the total effect of the errors on the balance of Neilson's retained earnings at December 31, 2017.
(d) Assume that the company has retained earnings on January 1, 2016 and 2017 of $1,250,000 and $1,607,000, respectively; net income for 2016 and 2017 of $422,000 and $375,000, respectively; and cash dividends declared for 2016 and 2017 of $65,000 and $45,000, respectively, before adjustment for the above items. Prepare a revised statement of retained earnings for 2016 and 2017.
(e) Outline the accounting treatment required by ASPE in this situation and explain how these requirements help investors.

Transcribed Image Text:

Ending inventory Depreciation expense December 31, 2016 $9,600 overstated $2,300 overstated December 31, 2017 $8,100 understated