Arnold Company’s December 31 year-end financial statements contained the following errors:
A three-year insurance premium of $7,200 was prepaid in 2024 covering the years 2024- 2026. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2024, fully depreciated machinery was sold for $3,800 cash, but the sale was not recorded until 2025. No corrections have been made for any of the errors.
What is the total net effect of the errors on Arnold’s 2024 net income?
a.Net income understated by $6,200
b.Net income understated by $1,400
c.Net income overstated by $1,000
d.Net income understated by $8,600
e.Net income understated by $1,000