Use the following information for questions.
Bishop Co.began operations on January 1, 2010.Financial statements for 2010 and 2011 con- tained the following errors:
In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012.No corrections have been made for any of the errors.Ignore income tax considerations.

-The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2011 is understated by

Question

Use the following information for questions.
Bishop Co.began operations on January 1, 2010.Financial statements for 2010 and 2011 con- tained the following errors:
In addition, on December 31, 2011 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2012.No corrections have been made for any of the errors.Ignore income tax considerations.
 
-The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2011 is understated by

Quizplus · Accepted Answer

To calculate the effect of the errors on Bishop's Retained Earnings balance at December 31, 2011, we need to look at the impact of the errors on net income for both years:

Net income 2010 = $80,000 - $20,000 - $6,000 = $54,000
Net income 2011 = $120,000 + $10,000 - $25,000 = $105,000

Correcting the errors would result in the following adjustments to net income:

2010:
- Depreciation expense: ($20,000 - $16,000) = -$4,000
- Unearned revenue: ($6,000 - $4,000) = -$2,000
Total adjustment = -$6,000

2011:
- Accounts receivable: ($25,000 - $15,000) = $10,000
Total adjustment = $10,000

So the total effect of the errors on Retained Earnings would be:

Retained Earnings 12/31/2011 without adjustments = $54,000 + $105,000 = $159,000
Adjustment for 2010 errors = -$6,000
Adjustment for 2011 errors = $10,000
Retained Earnings 12/31/2011 with adjustments = $159,000 - $6,000 + $10,000 = $163,000

However, we also need to factor in the sale of fully depreciated equipment for $28,800 that was not recorded in 2011. This would increase Retained Earnings by $28,800 in 2012, but since we're only concerned with the impact on 2011 Retained Earnings, we need to subtract this amount.

Final calculation: $163,000 - $28,800 = $134,200

So the balance of Bishop's Retained Earnings at December 31, 2011 is understated by $268,800 ($134,200 less than the correct balance). Therefore, the best choice is B.

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