ExpertHard1 markMultiple Choice
CPA · Question 16 · Area III: Select Transactions
Pinnacle Corp. discovered in Year 2 that it had failed to record depreciation expense of $45,000 in Year 1. The error was discovered before the Year 2 financial statements were issued. Pinnacle's tax rate is 25%.<br/><br/>How should Pinnacle correct this error in its Year 2 financial statements?
Pinnacle Corp. discovered in Year 2 that it had failed to record depreciation expense of $45,000 in Year 1. The error was discovered before the Year 2 financial statements were issued. Pinnacle's tax rate is 25%.<br/><br/>How should Pinnacle correct this error in its Year 2 financial statements?
Answer options:
A.
Debit Depreciation Expense $45,000; Credit Accumulated Depreciation $45,000
B.
Debit Retained Earnings $45,000; Credit Accumulated Depreciation $45,000
C.
Debit Retained Earnings $33,750; Credit Accumulated Depreciation $45,000; Credit Income Tax Receivable $11,250
D.
No entry required; disclose in notes only
How to approach this question
Error corrections are prior period adjustments under ASC 250. Adjust retained earnings for the net-of-tax effect of the error. Calculate the tax impact: additional depreciation creates a tax benefit (receivable or reduced payable).
Full Answer
C.Debit Retained Earnings $33,750; Credit Accumulated Depreciation $45,000; Credit Income Tax Receivable $11,250✓ Correct
Debit Retained Earnings $33,750; Credit Accumulated Depreciation $45,000; Credit Income Tax Receivable $11,250
Under ASC 250-10-45-23, material prior period errors require retrospective restatement. The missed depreciation understated expenses and overstated income in Year 1. The correction reduces retained earnings by the net-of-tax amount and creates a tax benefit since depreciation is deductible.
Common mistakes
Treating as current year expense, ignoring tax effects, or adjusting retained earnings for the gross amount instead of net-of-tax
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