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North Company has a fiscal year ending on December 31. Its financial statements for the years...

North Company has a fiscal year ending on December 31. Its financial statements for the years ended December 31, 2016 and 2017 contained the following errors: 2016 2017 Ending inventory $19,000 understated $15,000 overstated Bad debt expense 2,000 overstated 1,000 understate Assume no correcting entries have been made. Refer to Exhibit 22-6. By how much was North's 2017 net income overstated or understated? $14,000 overstated $23,000 understated $7,000 understated $35,000 overstated.

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Answer #1

Solution:

2016 Understated Ending inventory will become beginning inventory understatement for 2017.

Therefore, Net income will be Overstated due to beginning inventory understatement = $19000 (Income overstated)

Net income will be Overstated due to Ending inventory Overstatement of 2017 = $15000 (Income overstated)

No effect of bad debt expense overstatement of 2016.

Net income will be Overstated due to Bad debt expense Understatement of 2017 = $1000 (Income overstated)

Hence,

Net Income Overstated by total = 19000 +15000 + 1000 = $35,000

Hence last option " $35,000 overstated" is correct answer.

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