Peter Henning Tool Company’s December 31 year-end financial statements contained the following errors.

An insurance premium of $66,000 was prepaid in 2025 covering the years 2025, 2026, and 2027. The entire amount was charged to expense in 2025. In addition, on December 31, 2026, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2027. There were no other errors during 2025 or 2026, and no corrections have been made for any of the errors. (Ignore income tax considerations.)

Instructions

a. Compute the total effect of the errors on 2026 net income.

b. Compute the total effect of the errors on the amount of Henning’s working capital at December 31, 2026.

c. Compute the total effect of the errors on the balance of Henning’s retained earnings at December 31, 2026.

Transcribed Image Text:

Ending inventory Depreciation expense December 31, 2025 $9,600 understated 2,300 understated December 31, 2026 $8,100 overstated