Use the following information for questions 55 and 56.
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/14 and 12/31/15 contained the following errors:
-Assume that no correcting entries were made at 12/31/14, or 12/31/15. Ignoring income taxes, by how much will retained earnings at 12/31/15 be overstated or understated?
A) $40,000 overstatement
B) $35,000 overstatement
C) $50,000 understatement
D) $15,000 understatement

Question

Use the following information for questions 55 and 56.
Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/14 and 12/31/15 contained the following errors: 
-Assume that no correcting entries were made at 12/31/14, or 12/31/15. Ignoring income taxes, by how much will retained earnings at 12/31/15 be overstated or understated?
A) $40,000 overstatement 
B) $35,000 overstatement 
C) $50,000 understatement 
D) $15,000 understatement

Quizplus · Accepted Answer

Retained earnings at 12/31/15 will be understated by the total of the errors from the income statement ($25,000 overstatement of income) and balance sheet ($25,000 understatement of liabilities). This results in a total understatement of retained earnings of $50,000.

Use the Following Information for Questions 55 and 56