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

An insurance premium of £60,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The entire amount was charged to expense in 2014. In addition, on December 31, 2015, fully depreciated machinery was sold for £15,000 cash, but the entry was not recorded until 2016. There were no other errors during 2014 or 2015, 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 2015 net income.

(b) Compute the total effect of the errors on the amount of Emerson’s working capital at December 31, 2015.

(c) Compute the total effect of the errors on the balance of Emerson’s retained earnings at December 31, 2015.

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Ending Inventory Depreciation expense December 31, 2014 9,600 understated 2,300 understated December 31, 2015 7,100 overstated