Question 3 - Accounting Changes (4 marks)

DBTs auditors recently completed the 2021 audit and found the following errors:

December 31, 2019 year-end financial statements

• Ending inventory: $5,500 understated

December 31, 2020 year-end financial statements

• Depreciation expense: $4,000 overstated

• Ending inventory: $7,700 understated

Other items

• An insurance premium of $105,000 covering the years 2019, 2020, 2021 was prepaid in 2019 with the entire amount charged to an expense account that year.

• In addition, on December 31, 2021 fully depreciated machinery was sold for $20,000 cash, but the entry was not recorded until 2022.

Required:

For each error indicated above, determine the effect the error would have on the 2021 net income. Would it cause the 2021 net income to be overstated or understated and by what dollar amount? (4 marks). Please use the accompanying table to answer in the answer booklet.