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At the end of year I, Ritzcar Co. failed to accrue sales commissions earned during year I but paid in year 2. The error was not repeated in year 2. What was the effect of this errpr on year I ending working capital and on the year 2 ending retained earnings balance?

   year I ending working capital  year 2 ending retained earnings

a. Overstated                              Overstated 

b. No effect                                 Overstated 

c. No effect                                 No effect

d. Overstated                              No effect

Overstated                              No effect


Miller Co. discovered that in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 40%. What was the impact of the errpr on Miller's financial statements for the prior year?

Understatement of accumulated depreciation of $40,000. 


A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements?

   Current assets    Gross profit

a. Understated       Overstated

b. Overstated         Overstated

c. Understated        Understated

d. Overstated         Understated 

 Overstated         Overstated


While preparing its year 3 financial statements, Dek Corp. discovered computational errors in its year 2 and year I depreciation expense. These errors resulted in overstatement of each year's income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements:                                year 2              year I

Retained earnings, 1/1        $700,000         $500,000 

Net income                        $150,000           200,000

Retained earnings, 12/31    $850,000          $700,000

Dek's year 3 income is correctly reported at $180,000. Which of the following amounts should be adjusted to retained earnings and presented for net income in Dek's year 3 and year 2 comparative financial statements?

    Year        Retained earnings     net income 

a. year 2                                       150,000

    year 3     (50,000)                     180,000

b. year 2     (50,000)                   $150,000

    year 3                                        180,000

c. year 2     (50,000)                   $125,000

   year 3                                         180,000      

d. year 2                                      $125,000

   year 3                                         180,000 

   year 2     (50,000)                   $125,000

   year 3                                         180,000      


Beirn Company uses IFRS reporting. During the current year, the company discovered it had overstated sales in the prior year. How should Beirn handle this issue? 

 Restate the prior year financial statements presented for comparative purposes. 


At the beginning of the current year, Hayworth Co. sold equipment with a two-year service contract for a single payment of $20,000. The fair value of the equipment was $13,000. Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding Hayworth's current year financial statements? 

Net income will be overstated. 


Under IFRS reporting, prior period error includes all of the following except for:

a. Measurement mistakes.

b. Incorrect application of accounting policies.

c. Disclosure mistakes.

d. Changing accounting policies. 

Changing accounting policies. 


After the issuance of its year I financial statements Terry, Inc. discovered a computational error of $150,000 in the calculation of its December 31, year I inventory. The error resulted in a $150,000 overstatement in the cost of goods sold for the year ended December 31, year I. In October year 2, Terry paid $500,000 in settlement of litigation instituted against it during year I. Ignore income taxes. In the year 2 financial statements the December 31, year I retained earnings balance, as previously reported, should be adjusted by a 

$150,000 credit. 


On January 2, year 4, Raft Corp. discovered that it had incorrectly expensed a $210,000 machine purchased on January 2, year I. Raft estimated the machine's original useful life to be 10 years and its salvage value at $10,000. Raft uses the straight-line method of depreciation and is subject to a 30% tax rate. In its December 31, year 4 financial statements, what amount should Raft report as a prior period adjustment? 



How should company report its decision to change from cash basis of accounting to accrual basis of accounting?

As prior period adjustment (net of tax), by adjusting the beginning balance of retained earnings. 


Wilson Co.'s beginning inventory at January I, year I, was understated by $36,000, and its ending inventory was overstated by $57,000. As result, Wilson's cost of goods sold for year I was

 Understated by $93,000. 


During year 4, Olsen Company discovered that the ending inventories reported on its financial statements were understated as follows:

   Year    Understement

year I     $50,000 

year 2    $60,000

year 3    $0

Olsen ascertains year-end quantities on a periodic inventory system. These quantities are converted to dollar amounts using the FIFO cost flow method. Assuming no other accounting errors, Olsen's retained earnings at December 31, year 3, will be 



Which of the following characteristics does not relate to prior period adjustments?

a. They could not have been reasonably estimated in a prior period. b. They have a material effect on income from continuing operations of the current year.

c. They can be specifically identified with business activity of a prior period.

d.  They are attributable to economic events occurring subsequent to prior period financial statements.

They are attributable to economic events occurring subsequent to prior period financial statements.