Joseph Co. began operations on January 1, 2014. Financial statements for 2014 and 2015 contained the following errors:

Dec. 31, 2014 Dec. 31, 2015

Ending inventory $80,000 too high $104,000 too high

Depreciation expense 48,000 too low

Accumulated depreciation 48,000 too low 48,000 too low

Insurance expense 42,000 too high 42,000 too low

Prepaid insurance 36,000 too low

In addition, on December 26, 2015 fully depreciated equipment was sold for $48,000, but the sale was not recorded until 2016. No corrections have been made for any of the errors.

Instructions

Ignoring income taxes, show your calculation of the total effect of the errors on 2015 net income.

Solution 22-85

2014 ending inventory $ (80,000)

2015 ending inventory 104,000

Insurance expense 42,000

Unrecorded gain (48,000)

Overstatement of 2015 income $ 18,000

Note: The error in depreciation expense has no effect on 2015 income. The error in prepaid insurance is related to the error in insurance expense.