Reference no: EM132788204

Langley Company's December 31 year-end financial statements contained the following errors:

                                          Dec. 31, 2020                     Dec. 31, 2021

Ending inventory $37,500 understated                    $92,500 overstated

Depreciation expense 10,000 understated

An insurance premium of $90,000 was prepaid in 2020 covering the years 2020, 2021, and 2022. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2021, fully depreciated machinery was sold for $47,500 cash, but the sale was not recorded until 2022. There were noother errors during 2021 or 2022 and no corrections have been made for any of the errors. Ignore income tax considerations.

Problem 1: What is the total net effect of the errors on the amount of Langley's working capital at December 31, 2021?

Option 1: Working capital overstated by $25,000
Option 2: Working capital overstated by $7,500
Option 3: Working capital understated by $22,500
Option 4: Working capital understated by $60,000