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Armstrong Inc.is a calendar-year corporation.Its financial statements for the years ended 12\31\10 and 12\31\11 contained the following errors:

-Assume that no correcting entries were made at 12\31\10, or 12\31\11.Ignoring income taxes, by how much will retained earnings at 12\31\11 be overstated or understated?

Question

Use the following information for questions.
Armstrong Inc.is a calendar-year corporation.Its financial statements for the years ended 12\31\10 and 12\31\11 contained the following errors:
 
-Assume that no correcting entries were made at 12\31\10, or 12\31\11.Ignoring income taxes, by how much will retained earnings at 12\31\11 be overstated or understated?

Quizplus · Accepted Answer

The total effects of the errors on retained earnings are:

Net income for 2010 overstated by $6,000 ($31,000 - $25,000).
Depreciation expense for 2010 understated by $24,000 ($36,000 - $12,000).
Net income for 2011 understated by $12,000 ($58,000 - $70,000).
Retained earnings at 12/31/11 will be understated by $30,000 ($6,000 - $24,000 - $12,000).

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