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 amount of Bishop's working capital at December 31, 2015 is understated by
A) $390,800.
B) $306,800.
C) $174,800.
D) $114,800.

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 amount of Bishop's working capital at December 31, 2015 is understated by
A) $390,800. 
B) $306,800. 
C) $174,800. 
D) $114,800.

Quizplus · Accepted Answer

Working capital is calculated as current assets minus current liabilities. 
1. Inventory overstated by $75,000, which decreases working capital by $75,000.
2. Equipment is understated by $82,000, which decreases fixed assets and total assets by $82,000 but has no effect on working capital.
3. Accounts receivable overstated by $45,000, which decreases working capital by $45,000.
4. Prepaid expenses were understated by $18,000, which decreases assets and working capital by $18,000.
The total effect of these errors on working capital is: ($75,000 - $45,000 - $18,000) = $12,000 decrease in working capital. 
Additionally, the sale of fully depreciated equipment for $28,800 in 2015 was not recorded, which means there was no effect on working capital in 2015. 
Therefore, the total understatement of working capital at December 31, 2015 is $12,000, and the correct answer is C) $174,800.

Use the Following Information for Questions 61 Through 63