Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2018 and 2017 contained errors as follows:

2018 2017

Ending inventory $9,000 overstated $24,000 overstated

Depreciation expense $6,000 understated $18,000 overstated

A. Assume that the proper correcting entries were made at December 31, 2017. By how much will 2018 income before taxes be overstated or understated?

a. $ 3,000 understated

b. $ 3,000 overstated

c. $ 6,000 overstated

d. $15,000 overstated

B Assume that no correcting entries were made at December 31, 2017. Ignoring income taxes, by how much will retained earnings at December 31, 2018 be overstated or understated?

a. $ 3,000 understated

b. $22,500 overstated

c. $22,500 understated

d. $27,000 understated

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