ExpertMedium1 markMultiple Choice
CPA · Question 35 · Area III: Select Transactions
In Year 2, a company discovered that it failed to accrue $10,000 of warranty expense in Year 1. The tax rate is 30%. How should this error be reported in the Year 2 financial statements?
In Year 2, a company discovered that it failed to accrue $10,000 of warranty expense in Year 1. The tax rate is 30%. How should this error be reported in the Year 2 financial statements?
Answer options:
A.
As a $10,000 expense in the Year 2 Income Statement
B.
As a $7,000 adjustment to the beginning balance of Retained Earnings
C.
As a $10,000 adjustment to the beginning balance of Retained Earnings
D.
As a change in estimate prospectively
How to approach this question
Error Correction = Retrospective (Prior Period Adjustment). <br/>Adjust Beginning Retained Earnings NET OF TAX.
Full Answer
B.As a $7,000 adjustment to the beginning balance of Retained Earnings✓ Correct
B
Corrections of errors from prior periods are reported as adjustments to the beginning balance of Retained Earnings (net of tax). <br/>Gross Error: $10,000 expense.<br/>Tax Effect: $3,000.<br/>Net Adjustment: $7,000 decrease to RE.
Common mistakes
Reporting it in current income. Forgetting the tax effect.
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