Question

Bishop Co. began operations on January 1, 2012. Financial statements for 2012 and 2013 con- tained the following errors:

Dec. 31, 2012 Dec. 31, 2013
Ending inventory $132,000 too high $166,000 too low
Depreciation expense 84,000 too high —
Insurance expense 60,000 too low 60,000 too high
Prepaid insurance 60,000 too high —
In addition, on December 31, 2013 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2014. No corrections have been made for any of the errors. Ignore income tax considerations.

The total effect of the errors on Bishop's 2013 net income is
a. understated by $386,800.
b. understated by $254,800.
c. overstated by $137,200.
d. overstated by $269,200.

Answer 1

The errors in the financial statements of Bishop Co. have different impacts on the net income for 2013, resulting in an overstatement of $352,000.

Step-by-step explanation:

The errors in the financial statements of Bishop Co. have different impacts on the net income for 2013.

1. The ending inventory was overstated by $132,000 at the end of 2012. This error would result in an overstatement of the cost of goods sold for 2013. Therefore, the net income for 2013 would be understated by $132,000.
2. The ending inventory was understated by $166,000 at the end of 2013. This error would result in an understatement of the cost of goods sold for 2013. Therefore, the net income for 2013 would be overstated by $166,000.
3. The depreciation expense was overstated by $84,000 in 2012, but there was no depreciation expense in 2013. This error would result in an overstatement of the expenses for 2012 and an understatement of the expenses for 2013. Therefore, the net income for 2013 would be overstated by $84,000.
4. The insurance expense was understated by $60,000 in 2012 and then overstated by $60,000 in 2013. This error would result in an understatement of the expenses for 2012 and an overstatement of the expenses for 2013. Therefore, the net income for 2013 would be overstated by $60,000.
5. The prepaid insurance was overstated by $60,000 in 2012. This error would result in an understatement of the expenses for 2013. Therefore, the net income for 2013 would be understated by $60,000.
6. The sale of fully depreciated equipment for $28,800 in 2013 was not recorded until 2014. This error would result in an overstatement of the assets for 2013 and an understatement of the gain on sale for 2013. Therefore, the net income for 2013 would be understated by $28,800.

The total effect of these errors on Bishop's 2013 net income would be an overstatement of $352,000 ($166,000 + $84,000 + $60,000 - $60,000 - $28,800).