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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Shannon Corporation began operations on January 1, 2019. Financial statements for the years ended December 31, 2019 and 2020, contained the following errors:

Chapter 22, Problem 10MC, Shannon Corporation began operations on January 1, 2019. Financial statements for the years ended

In addition, on December 31, 2020, fully depreciated machinery was sold for $10,800 cash, but the sale was not recorded until 2021. There were no other errors during 2019 or 2020, and no corrections have been made for any of the errors.

Refer to the information for Shannon Corporation above. Ignoring income taxes, what is the total effect of the errors on the amount of working capital (current assets minus current liabilities) at December 31, 2020?

  1. a. working capital overstated by $4,200
  2. b. working capital understated by $5,800
  3. c. working capital understated by $6,000
  4. d. working capital understated by $9,800

To determine

Find the correct option, the option that indicates the total effect of errors on the working capital of Corporation S, in 2020.

Explanation

Errors: The comparability and consistency of the financial statements decreases when a company records arithmetic mistakes, or errors. Such errors do require adjustments to make the financial information more reliable, and more relevant.

Compute the total effect of errors on the working capital of Corporation S, in 2020.

ErrorsEffect on Current AssetsEffect of Current LiabilitiesEffect on Working Capital
Overstated ending inventory, $15,000Current assets (inve...

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