Arnold Companys December 31 year-end financial statements contained the following errors:

A three-year insurance premium of $7,200 was prepaid in 2024 covering the years 2024- 2026. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2024, fully depreciated machinery was sold for $3,800 cash, but the sale was not recorded until 2025. No corrections have been made for any of the errors.

What is the total effect of the errors on the balance of Arnolds retained earnings at December 31, 2024?

Select one:

a. Retained earnings understated by $6,200

b. Retained earnings understated by $1,000

c. Retained earnings understated by $8,600

d. Retained earnings overstated by $1,400

e. Retained earnings understated by $1,400