Use the following information for questions.
Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $3,600 was prepaid in 2016 covering the calendar years 2016, 2017, and 2018.This had been debited to insurance expense.In addition, on December 31, 2017, fully depreciated machinery was sold for $1,900 cash, but the sale was not recorded until 2018.There were no other errors during 2017 or 2018 and no corrections 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 Cheyenne's working capital at December 31, 2017?
A)Working capital overstated by $1,000
B)Working capital overstated by $300
C)Working capital understated by $900
D)Working capital understated by $2,400

Question

Use the following information for questions.
Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors:  An insurance premium of $3,600 was prepaid in 2016 covering the calendar years 2016, 2017, and 2018.This had been debited to insurance expense.In addition, on December 31, 2017, fully depreciated machinery was sold for $1,900 cash, but the sale was not recorded until 2018.There were no other errors during 2017 or 2018 and no corrections 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 Cheyenne's working capital at December 31, 2017?
A)Working capital overstated by $1,000 
B)Working capital overstated by $300 
C)Working capital understated by $900 
D)Working capital understated by $2,400

Quizplus · Accepted Answer

The prepaid insurance expense was overstated by $1,200 per year for 2017 and 2018, resulting in an overstatement of working capital by $2,400. The sale of the fully depreciated machinery was not recorded in 2017 but should have been, resulting in an understatement of working capital by $1,500 ($1,900 sale proceeds - $400 carrying amount). Therefore, the net effect of the errors on the amount of Cheyenne's working capital at December 31, 2017, is an understatement of $900 ($2,400 overstatement - $1,500 understatement).

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