TRUE 2.

Errors in financial statements result from mathematical mistakes or oversight or misuse of facts
that existed when preparing the financial statements.
TRUE 15.Companies record corrections of errors from prior periods as an adjustment to the beginning
balance of retained earnings in the current period.
T 17. Balance sheet errors affect only the presentation of an asset or liability account.
F 18. Counterbalancing errors are those that will be offset and that take longer than two periods to
correct themselves.
T 19. For counterbalancing errors, restatement of comparative financial statements is necessary even
if a correcting entry is not required.
T 20. Companies must make correcting entries for noncounterbalancing errors, even if they have
closed the prior years books.
37.An example of a correction of an error in previously issued financial statements is a change
c. from the cash basis of accounting to the accrual basis of accounting.

38. Counterbalancing errors do not include
b. errors that correct themselves in three years.

Use the following information for questions 55 and 56.
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/12 and
12/31/13 contained the following errors:
2012 2013
Ending inventory $20,000 overstatement $32,000 understatement
Depreciation expense 8,000 understatement 16,000 overstatement

55. Assume that the 2012 errors were not corrected and that no errors occurred in 2011. By what
amount will 2012 income before income taxes be overstated or understated?
a. $28,000 overstatement


56. Assume that no correcting entries were made at 12/31/12, or 12/31/13. Ignoring income taxes,
by how much will retained earnings at 12/31/13 be overstated or understated?
c. $40,000 understatement
Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2012 Dec. 31, 2013
Ending inventory $15,000 understated $22,000 overstated
Depreciation expense 4,000 understated

An insurance premium of $36,000 was prepaid in 2012 covering the years 2012, 2013, and 2014. The
prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2013, fully
depreciated machinery was sold for $19,000 cash, but the sale was not recorded until 2014. There were
no other errors during 2013 or 2014 and no corrections have been made for any of the errors. Ignore
income tax considerations.

57. What is the total net effect of the errors on Langley's 2013 net income?
d. Net income overstated by $30,000.

58. What is the total net effect of the errors on the amount of Langley's working capital at
December 31, 2013?
c. Working capital understated by $9,000
\

59. What is the total effect of the errors on the balance of Langley's retained earnings at December
31, 2013?
c. Retained earnings understated by $5,000

60. Accrued salaries payable of $51,000 were not recorded at December 31, 2012. Office supplies
on hand of $34,000 at December 31, 2013 were erroneously treated as expense instead of supplies
inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would
cause
a. 2013 net income to be understated $85,000 and December 31, 2013 retained earnings to
be understated $34,000.
b. 2012 net income and December 31, 2012 retained earnings to be understated $51,000 each.
c. 2012 net income to be overstated $17,000 and 2013 net income to be understated $34,000.
d. 2013 net income and December 31, 2013 retained earnings to be understated $34,000 each.

Use the following information for questions 61 through 63.
Bishop Co. began operations on January 1, 2012. Financial statements for 2012 and 2013 con- tained the
following errors:
Dec. 31, 2012 Dec. 31, 2013
Ending inventory $132,000 too high $166,000 too low
Depreciation expense 84,000 too high
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high
In addition, on December 31, 2013 fully depreciated equipment was sold for $28,800, but the sale was
not recorded until 2014. No corrections have been made for any of the errors. Ignore income tax
considerations.

61. The total effect of the errors on Bishop's 2013 net income is
a. understated by $386,800.
b. understated by $254,800.
c. overstated by $137,200.
d. overstated by $269,200.

62. The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2013
is understated by
a. $338,800.
b. $278,800.
c. $194,800.
d. $146,800.

63. The total effect of the errors on the amount of Bishop's working capital at December 31, 2013 is
understated by
a. $410,800.
b. $326,800.
c. $194,800.
d. $134,800.

Use the following information for questions 64 and 65.
Link Co. purchased machinery that cost $1,350,000 on January 4, 2011. The entire cost was recorded as
an expense. The machinery has a nine-year life and a $90,000 residual value. The error was discovered
on December 20, 2013. Ignore income tax considerations.

64. Link's income statement for the year ended December 31, 2013, should show the cumulative
effect of this error in the amount of
a. $1,210,000.
b. $1,070,000.
c. $930,000.
d. $0.

65. Before the correction was made, and before the books were closed on December 31, 2013,
retained earnings was understated by
a. $1,350,000.
b. $1,210,000.
c. $1,070,000.
d. $930,000.
Use the following information for questions 66 and 67.

Ernst Company purchased equipment that cost $1,500,000 on January 1, 2012. The entire cost was
recorded as an expense. The equipment had a nine-year life and a $60,000 residual value. Ernst uses the
straight-line method to account for depreciation expense. The error was discovered on December 10,
2014. Ernst is subject to a 40% tax rate.

66. Ernsts net income for the year ended December 31, 2012, was understated by
a. $804,000.

67. Before the correction was made and before the books were closed on December 31, 2014,
retained earnings was understated by
c. $708,000.

74.On January 1, 2012, Janik Corp. acquired a machine at a cost of $800,000. It is to be depreciated on
the straight-line method over a five-year period with no residual value. Because of a
bookkeeping error, no depreciation was recognized in Janik's 2012 financial statements. The
oversight was discovered during the preparation of Janik's 2013 financial statements.
Depreciation expense on this machine for 2013 should be
b. $160,000.

75. On December 31, 2013, special insurance costs, incurred but unpaid, were not recorded. If these
insurance costs were related to work in process, what is the effect of the omission on accrued
liabilities and retained earnings in the December 31, 2013 balance sheet?
Accrued Liabilities Retained Earnings
c. Understated No effect

76. Black, Inc. is a calendar-year corporation whose financial statements for 2012 and 2013 included
errors as follows:
Year Ending Inventory Depreciation Expense
2012 $162,000 overstated $135,000 overstated
2013 59,000 understated 45,000 understated
Assume that purchases were recorded correctly and that no correcting entries were made at
December 31, 2012, or at December 31, 2013. Ignoring income taxes, by how much should
Black's retained earnings be retroactively adjusted at January 1, 2014?
a. $149,000 increase