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Ignore taxes.
Peach Inc.'s financial statements for the years 2017 and 2018 contained errors as follows:
-Assuming that the errors made in 2017 were corrected, but that the errors made in 2018 were not detected, by what amount will 2018 income before taxes be overstated or understated?
A)$5,000 overstated
B)$8,500 overstated
C)$1,500 understated
D)$1,500 overstated

Question

Use the following information for questions.
Ignore taxes.
Peach Inc.'s financial statements for the years 2017 and 2018 contained errors as follows: 
-Assuming that the errors made in 2017 were corrected, but that the errors made in 2018 were not detected, by what amount will 2018 income before taxes be overstated or understated?
A)$5,000 overstated 
B)$8,500 overstated 
C)$1,500 understated 
D)$1,500 overstated

Quizplus · Accepted Answer

Since the errors made in 2017 were corrected, they will not affect the 2018 financial statements. Therefore, the errors made in 2018 will only affect the 2018 income before taxes. Looking at the table, we can see that the net book value of the fixed assets was overstated by $15,000 in 2018. This will cause the 2018 income before taxes to be overstated by the same amount, $15,000. However, we also see that the depreciation expense was understated by $13,500. This will cause the income before taxes to be understated by $13,500. Therefore, the net effect of the errors made in 2018 is an overstatement of $1,500 ($15,000 - $13,500) in income before taxes. The correct answer is D.

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