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

An insurance premium of $66,000 covering the years 2019, 2020, and 2021 was prepaid in 2019, with the entire amount charged to expense that year. In addition, on December 31, 2020, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2021. There were no other errors during 2019 or 2020, 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 2020 net income. 

b. Calculate the total effect of the errors on the amount of Neilson's working capital at December 31, 2020. 

c. Calculate the total effect of the errors on the balance of Neilson's retained earnings at December 31, 2020. 

d. Assume that the company has retained earnings on January 1, 2019 and 2020, of $1,250,000 and $1,607,000, respectively; net income for 2019 and 2020 of $422,000 and $375,000, respectively; and cash dividends declared for 2019 and 2020 of $65,000 and $45,000, respectively, before adjustment for the above items. Prepare a revised statement of retained earnings for 2019 and 2020. 

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

Transcribed Image Text:

December 31, 2019 December 31, 2020 Ending inventory Depreciation expense $9,600 overstated $8,100 understated $2,300 overstated