Question

Accrued salaries payable of 51,000 were not recorded at December 31, 2014. Office supplies on hand of 29,000 at December 31, 2015 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?

1) 2015 net income to be understated 80,000 and December 31, 2015 retained earnings to be understated 29,000.
2) 2014 net income and December 31, 2014 retained earnings to be understated 51,000 each.
3) 2014 net income to be overstated 22,000 and 2015 net income to be understated 29,000.
4) 2015 net income and December 31, 2015 retained earnings to be understated 29,000 each.

Answer 1

In 2015, the net income and December 31, 2015 retained earnings would be both understated by $29,000 due to the wrong classification of office supplies expense. Hence, option 4 is correct.

Step-by-step explanation:

To address the student's question, we need to analyze the impact of the errors on the financial statements.

First, the accrued salaries of $51,000 not being recorded at the end of 2014 would result in both net income and retained earnings for 2014 being understated by the same amount, as this expense was not accounted for.

This error carries over into 2015, because the beginning balance of retained earnings for 2015 would also be understated by $51,000.

Secondly, the office supplies expense of $29,000 at the end of 2015 being recorded as an expense instead of as inventory would understate 2015 net income and the ending balance of retained earnings for 2015, since this amount should have been recorded as an asset until it was consumed.

Combining the effects of both errors, the correct answer is that in 2014, the net income and December 31, 2014 retained earnings would be understated by $51,000 each, due to the unrecorded salaries.