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

Three-year insurance premium of $7,200 was prepaid in 2017 covering the years 2017- 2019. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2017, fully depreciated machinery was sold for $3,800 cash, but the sale was not recorded until 2018. No corrections have been made for any of the errors.

What is the total net effect of the errors on Arnold's 2018 net income?

Select one:

a. Net income overstated by $6,200b. Net income understated by $1,400c. Net income overstated by $2,400d. Net income understated by $1,000e. Net income understated by $3,800