Use the following information for questions 61 through 63.
Bishop Co. began operations on January 1, 2014. Financial statements for 2014 and 2015 con- tained the following errors: In addition, on December 31, 2015 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2016. No corrections have been made for any of the errors. Ignore income tax considerations.
-The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2015 is understated by
A) $318,800.
B) $258,800.
C) $174,800.
D) $126,800.

Question

Use the following information for questions 61 through 63.
Bishop Co. began operations on January 1, 2014. Financial statements for 2014 and 2015 con- tained the following errors:  In addition, on December 31, 2015 fully depreciated equipment was sold for $28,800, but the sale was not recorded until 2016. No corrections have been made for any of the errors. Ignore income tax considerations.
-The total effect of the errors on the balance of Bishop's retained earnings at December 31, 2015 is understated by
A) $318,800. 
B) $258,800. 
C) $174,800. 
D) $126,800.

Quizplus · Accepted Answer

To determine the effect of the errors on the balance of Bishop's retained earnings at December 31, 2015, we need to calculate the cumulative effect of the errors on net income for 2014 and 2015:
Net income for 2014 = $269,000 - $19,000 - $20,000 - $26,000 = $204,000
Net income for 2015 = $301,000 - $8,000 - $35,000 - $16,000 = $242,000
Total net income for 2014 and 2015 = $204,000 + $242,000 = $446,000
The correct net income for 2014 and 2015 should have been:
Net income for 2014 = $277,000
Net income for 2015 = $322,000
Total net income for 2014 and 2015 = $599,000
Therefore, the errors have understated the balance of Bishop's retained earnings at December 31, 2015 by $599,000 - $340,000 = $259,000. However, we need to add back the amount of the equipment sale that was not recorded in 2015:
Total effect of the errors on the balance of Bishop's retained earnings at December 31, 2015 = $259,000 + $28,800 = $287,800, which is closest to choice B.

Use the Following Information for Questions 61 Through 63