Exhibit 22-4 Barbara Company's year-end December 31, 2014, financial statements contained the following errors:
Ending inventory on December 31, 2014, was overstated by $75,000.
Depreciation expense was understated by $7,000.
A two-year insurance policy for 2014 and 2015 in the amount of $14,000 was entirely expensed in 2014.
Investments in common stock of other companies were sold in 2014 at a gain of $10,000, but the sale was not recorded until 2015.
-Refer to Exhibit 22-4. What is the effect of the above errors on 2014 net income?

Question

Exhibit 22-4 Barbara Company's year-end December 31, 2014, financial statements contained the following errors: 
Ending inventory on December 31, 2014, was overstated by $75,000.
Depreciation expense was understated by $7,000.
A two-year insurance policy for 2014 and 2015 in the amount of $14,000 was entirely expensed in 2014.
Investments in common stock of other companies were sold in 2014 at a gain of $10,000, but the sale was not recorded until 2015.
-Refer to Exhibit 22-4. What is the effect of the above errors on 2014 net income?

Quizplus · Accepted Answer

Ending inventory overstatement of $75,000 would decrease cost of goods sold by $75,000, thereby increasing net income by $75,000. Understatement of depreciation expense of $7,000 would increase net income by $7,000. Expensing the two-year insurance policy in full for 2014 would decrease net income by $7,000 ($14,000/2). Failing to record the sale of investments at a gain of $10,000 would decrease net income by $10,000. Therefore, the total effect on net income is an overstatement of $75,000 + $7,000 - $7,000 + $10,000 = $65,000.

Exhibit 22-4 Barbara Company's Year-End December 31, 2014, Financial Statements