Use the Following Information for Questions

question 54

Multiple Choice

Use the following information for questions.
Langley Company's December 31 year-end financial statements contained the following errors:

An insurance premium of $18,000 was prepaid in 2010 covering the years 2010, 2011, and 2012.The prepayment was recorded with a debit to insurance expense.In addition, on December 31, 2011, fully depreciated machinery was sold for $9,500 cash, but the sale was not recorded until 2012.There were no other errors during 2011 or 2012 and no corrections have been made for any of the errors.Ignore income tax considerations.
-What is the total effect of the errors on the balance of Langley's retained earnings at December 31, 2011?

• A)Retained earnings understated by $10,000
• B)Retained earnings understated by $4,500
• C)Retained earnings understated by $2,500
• D)Retained earnings overstated by $3,500

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