Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors: An insurance premium of $54,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2015, fully depreciated machinery was sold for $28,500 cash, but the sale was not recorded until 2016. There were no other errors during 2015 or 2016 and no corrections have been made for any of the errors. Ignore income tax considerations.
-What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2015?
A) Retained earnings understated by $30,000
B) Retained earnings understated by $13,500
C) Retained earnings understated by $7,500
D) Retained earnings overstated by $10,500

Question

Use the following information for questions 57 through 59.
Langley Company's December 31 year-end financial statements contained the following errors:  An insurance premium of $54,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2015, fully depreciated machinery was sold for $28,500 cash, but the sale was not recorded until 2016. There were no other errors during 2015 or 2016 and no corrections have been made for any of the errors. Ignore income tax considerations.
-What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2015?
A) Retained earnings understated by $30,000 
B) Retained earnings understated by $13,500 
C) Retained earnings understated by $7,500 
D) Retained earnings overstated by $10,500

Quizplus · Accepted Answer

The errors resulted in a net understatement of $7,500 in retained earnings by December 31, 2015.

Use the Following Information for Questions 57 Through 59