21-Solutions to P21-11

# 21-Solutions to P21-11 - PROBLEM 21-11 Item 1 2 3 4 5 6 Net...

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PROBLEM 21-11 Net Income for 2010 Retained Earnings 12/31/11 Item Understated Overstated Understated Overstated 1. 2. 3. 4. 5. 6. \$14,100 \$11,813 0 \$33,000 0 \$12,600 0 0 \$18,000 0 \$21,000 0 0 \$ 8,438 0 \$33,000 0 0 0 0 \$ 9,000 0 \$10,500 0 Explanations: 1. The net income would be understated in 2010 because interest income is understated. The net income would be overstated in 2011 because interest income is overstated. The errors, however, would counterbalance (wash) so that the Balance Sheet (Retained Earnings) would be correct at the end of 2011. The amount of understatement in 2010 would be \$18,800 X (1 – 25%) = \$14,100. 2. The depreciation expense in 2010 should be \$2,250 for this machine. Since the machine was bought on July 1, 2010, only one-half of a year should be taken in 2010 (\$18,000/4 X 1/2 = \$2,250). The company expensed \$18,000 instead of \$2,250 so net income is understated by \$15,750 X (1 – 25%) = \$11,813 in 2010. An additional \$4,500 of depreciation expense should have been taken in 2011. At the end of 2011, retained earnings would be understated by \$11,250 (\$15,750 – \$4,500) net of taxes of 25% = \$8,438.

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