Question

Moonland Company's income statement contained the following errors: Ending inventory, December 31, 2021, understated by $9,000 Depreciation expense for 2021 overstated by $1,700 What is the effect of the errors on 2021 net income before taxes

Answer 1

Understatement of net income before taxes by $9,000 and $1,700 by both errors.

Step-by-step explanation:

For inventory account, its movement is denoted as;

Opening balance + purchases/production - cost of goods sold = closing inventory

The value of $9,000 means an understatement of closing inventory whereas same value overstates the cost of goods sold. The final outcome is that same value of $9,000 would reduce or understate net income balance.

Also, where an expense is overstated, such would understate the net income balance. With regards to the overstatement of depreciation by $1,700, the net income will be affected(understated) by same amount.