Assume that no correcting entries were made at 12/31/14, or 12/31/15. ignoring income taxes, by how much will retained earnings at 12/31/15 be overstated or understated?
a. $40,000 overstatement
b. $35,000 overstatement
c. $50,000 understatement
d. $15,000 understatement

Use the following information for questions 55 and 56.

Armstrong Inc. is a calendar-year corporation. Its financial statements for the years ended 12/31/14 and 12/31/15 contained the following errors:

2014 2015

Ending inventory $25,000 overstatement $40,000 understatement

Depreciation expense 10,000 understatement 20,000 overstatement

By $50,000 retained earnings at 12/31/15 is understated

Option c, $50,000 understatement

Explanation:

Given:

Ending inventory $25,000 overstatement $40,000 understatement

Depreciation expense 10,000 understatement 20,000 overstatement

To find:

The retained earnings amount to be overstated or understated at 12/31/15

When an amount is understated, it depicts the following two things,

Here, the reatianed earnings amount can be evaluated by the following step,

So, it can be finalised that the retained earnings of $50,000 is understated.

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