1. Rodney Company's December 31 year-end financial statements contained the following errors:
December 31, 2010 December 31, 2011
Ending inventory .......... $4,000 understated $3,600 overstated
Depreciation expense ...... 800 understated --
An insurance premium of $3,600 was prepaid in 2010 covering the years 2010, 2011, and 2012. The entire amount was charged to expense in 2010. In addition, on December 31, 2011, fully depreciated machinery was sold for $6,400 cash, but the sale was not recorded until 2012. There were no other errors during 2010 or 2011, and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total effect of the errors on 2011 net income?
a. Net income is understated by $12,800.
b. Net income is overstated by $3,600.
c. Net income is understated by $1,600.
d. Net income is overstated by $2,400.
2. Kentucky Enterprises purchased a machine on January 2, 2010, at a cost of $120,000. An additional $50,000 was spent for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life of five years and a salvage value of $20,000. As a result of the error,
a. retained earnings at December 31, 2011, was understated by $30,000 and 2011 income was overstated by $6,000.
b. retained earnings at December 31, 2011, was understated by $38,000 and 2011 income was overstated by $6,000.
c. retained earnings at December 31, 2011, was understated by $30,000 and 2011 income was overstated by $10,000.
d. 2010 income was understated by $50,000.
The solution discusses the accounting errors and corrections.