Question

The Pandora Company made the following errors on 12/31/19: Recorded the expiration of prepaid insurance by debiting Sales Revenue and crediting Depreciation Expense for $12. Recorded the issuance of 10-year bonds at par value by debiting Unearned Revenue and crediting Common Stock for $13. 12/31/19 Total Stockholders’ Equity is in error by:

Answer 1

Total Stockholders’ Equity is in error by: $25.

Step-by-step explanation:

It is important to remember that Stockholders’ Equity consist of Retained Profit and Common Stock and effect on the errors on these elements ultimately affects Stockholders’ Equity.

The correct entry for expiration of prepaid insurance

Insurance Expense $12 (debit)

Prepaid Insurance $12 (credit)

Effect on net profit of the error : overstatement of profit by $12

Effect on common stock of the error : none

The correct entry for Issuance of bonds :

Investments in Bonds $12 (debit)

Cash $12 (credit)

Effect on net profit of the error : none

Effect on common stock of the error : overstatement by $13

Conclusion :

Total Effect on Stockholders’ Equity = Overstatement of $25.