Question

Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2018 and 2017 contained errors as follows:

2018 2017

Ending inventory $9,000 overstated $24,000 overstated

Depreciation expense $6,000 understated $18,000 overstated

A. Assume that the proper correcting entries were made at December 31, 2017. By how much will 2018 income before taxes be overstated or understated?

a. $ 3,000 understated

b. $ 3,000 overstated

c. $ 6,000 overstated

d. $15,000 overstated

B Assume that no correcting entries were made at December 31, 2017. Ignoring income taxes, by how much will retained earnings at December 31, 2018 be overstated or understated?

a. $ 3,000 understated

b. $22,500 overstated

c. $22,500 understated

d. $27,000 understated

Answer 1

A. Option (d) is correct.

B. Option (a) is correct.

Step-by-step explanation:

Given that,

Ending inventory(2018) = $9,000

Ending inventory(2017) = $24,000

Depreciation expense(2018) = $6,000

Depreciation expense(2017) = $18,000

A. 2018 income before taxes be overstated or understated:

= Ending inventory + Depreciation expense(2018)

= $9,000 + $6,000

= $15,000 overstated

B. Retained earnings at December 31, 2018 be overstated or understated:

= Depreciation Expense for 2017 - Depreciation Expense for 2018 - Ending inventory

= $18,000 - $6,000 - $9,000

= $3,000 understated