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Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors: An insurance premium of $3,600 was prepaid in 2016 covering the calendar years 2016, 2017, and 2018.This had been debited to insurance expense.In addition, on December 31, 2017, fully depreciated machinery was sold for $1,900 cash, but the sale was not recorded until 2018.There were no other errors during 2017 or 2018 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 Cheyenne's retained earnings at December 31, 2017?
A)Retained earnings understated by $2,000
B)Retained earnings understated by $900
C)Retained earnings understated by $500
D)Retained earnings overstated by $700

Question

Use the following information for questions.
Cheyenne Ltd.'s December 31 year-end financial statements contained the following errors:  An insurance premium of $3,600 was prepaid in 2016 covering the calendar years 2016, 2017, and 2018.This had been debited to insurance expense.In addition, on December 31, 2017, fully depreciated machinery was sold for $1,900 cash, but the sale was not recorded until 2018.There were no other errors during 2017 or 2018 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 Cheyenne's retained earnings at December 31, 2017?
A)Retained earnings understated by $2,000 
B)Retained earnings understated by $900 
C)Retained earnings understated by $500 
D)Retained earnings overstated by $700

Quizplus · Accepted Answer

The effect of the errors on the balance of Cheyenne's Retained Earnings at December 31, 2017 can be calculated as follows:

1. The prepaid insurance expense of $3,600 was debited to insurance expense in 2016. This means that the expense was not recognized in 2017. Therefore, Retained Earnings is overstated by $3,600 at the end of 2017.

2. The sale of fully depreciated machinery for $1,900 in cash was not recorded until 2018. This means that the gain on sale was not recognized in 2017. Therefore, Retained Earnings is understated by $1,900 at the end of 2017.

Total effect on Retained Earnings at December 31, 2017 = Overstatement of $3,600 - Understatement of $1,900 = Overstatement of $1,700

Therefore, the correct answer is C) Retained earnings understated by $500.

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