Langley Company's December 31 year-end financial statements contained the following errors:

Dec. 31, 2020Dec. 31, 2021

Endinginventory$37,500understated$92,500 overstated

Depreciationexpense10,000 understated

An insurance premium of $90,000 was prepaid in 2020 covering the years 2020, 2021, and 2022. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2021, fully depreciated machinery was sold for $47,500 cash, but the sale wasnotrecorded until 2022. There werenoother errors during 2021 or 2022 andnocorrections have been made for any of the errors. Ignore income tax considerations.

What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2021?

1. Working capital overstated by $25,000
2. Working capital overstated by $7,500
3. Working capital understated by $22,500
4. Working capital understated by $60,000