Reporting Errors from Previous Periods
Endicott Company’s December 31, 2007, balance sheet reported retained earnings of $86,500, and net income of $124,000 was reported in the 2007 income statement. While preparing financial statements for the year ended December 31, 2008, Tom Dr. yden, accountant for Endicott Company, discovered that net income for 2007 had been overstated by $36,000 due to an error in recording depreciation expense for 2007. Net income for 2008 was $106,000, and dividends of $30,000 were declared and paid in 2008.
1. What effect, if any, would the $36,000 error made in 2007 have on the company’s 2008 financial statements?
2. Compute the amount of retained earnings to be reported in Endicott Company’s December 31, 2008, balance sheet.