Othello Company understated its inventory by $20,000 at December 31, 2014. It did not correct the error in 2014 or 2015. As a result, Othello's stockholder's equity was:
A)understated at December 31, 2014, and overstated at December 31, 2015.
B)understated at December 31, 2014, and properly stated at December 31, 2015.
C)overstated at December 31, 2014, and overstated at December 31, 2015.
D)understated at December 31, 2014, and understated at December 31, 2015.

Question

Quizplus · Accepted Answer

The understatement of inventory in 2014 causes an understatement of net income and stockholder's equity for that year. However, by the end of 2015, the error self-corrects in the financial statements, leaving stockholder's equity properly stated.

Othello Company Understated Its Inventory by $20,000 at December 31