Question

14. Accrued salaries payable of $51,000 were not recorded at December 31, 2014. This error got counter-balanced when cash salaries of $51,000 were paid in 2015. The error was never discovered or corrected. The effect of the error would cause

A. 2014 net income to be overstated $51,000 and December 31, 2015 retained earnings to be understated $51,000

B. December 31, 2014 retained earnings to be overstated $51,000 and December 31, 2015 retained earnings to be correct.

C. 2014 net income to be understated $51,000 and 2015 net income to be overstated $51,000

D. 2014 net income and December 31, 2014 retained earnings to be understated $51,000 each.

Answer 1

Answer is B. Dec31 2014 retained earnings to be overstated $51,000 and Dec31, 2015 retained earnings to be correct.

Explanation:

The net income of the year 2014 is over-stated as the salaries payable is not recorded in the year resulting in under-statement of salaries expense and over-statement of net income and resulting Retained earnings.

However, when the whole of salaries (including the accrued of last year) paid in 2015, then the net income of the Year-2015 is under-stated but the balance of retained earnings at end of 2015 is counter balanced.