Hennesey Tool Corporation€™s December 31 year-end financial statements contained the following errors:

An insurance premium of $66,000 covering the years 2010, 2011, and 2012 was prepaid in 2010, with the entire amount charged to expense that year. In addition, on December 31, 2011, fully depreciated machinery was sold for $15,000 cash, but the entry was not recorded until 2012. There were no other errors during 2010 or 2011, and no corrections have been made for any of the errors. Hennesey follows accounting standards for private enterprises.
Instructions
Answer the following, ignoring income tax considerations.
(a) Calculate the total effect of the errors on 2011 net income.
(b) Calculate the total effect of the errors on the amount of Hennesey€™s working capital at December 31, 2011.
(c) Calculate the total effect of the errors on the balance of Hennesey€™s retained earnings at December 31, 2011.
(d) Assume that the company has retained earnings on January 1, 2010 and 2011, of $1,250,000 and $1,607,000, respectively; net income for 2010 and 2011 of $422,000 and $375,000, respectively; and cash dividends declared for 2010 and 2011 of $65,000 and $45,000, respectively, before adjustment for the above items. Prepare a revised statement of retained earnings for 2010 and 2011.
(e) Outline the accounting treatment required by ASPE in this situation and explain how these requirements help investors.

Transcribed Image Text:

Ending inventory Depreciation expense December 31, 2010 $9,600 overstated $2,300 overstated December 31, 2011 $8,100 understated