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First-time poster; long-time reader.
I failed FAR with a 73 last testing window (FAR is my last exam!). To add new material, I purchased Wiley Test Bank while reviewing Becker again.
A question in the Wiley Test Bank popped up today regarding Error Correction Adjustments:
While preparing its year 3 financial statements, Dek Corp. discovered computational errors in its year 2 and year 1 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:
For Year 2:
Retained earnings, 1/1 = $700,000
Net income = 150,000
Retained earnings, 12/31 = 850,000
For Year 1
Retained earnings, 1/1 = $500,000
Net income = 200,000
Retained earnings, 12/31 = 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 -0- $150,000
Year 3 ($50,000) $180,000
b. Year 2 ($50,000) $150,000
Year 3 -0- $180,000
c. Year 2 ($50,000) $125,000
Year 3 -0- $180,000
d. Year 2 -0- $125,000
Year 3 -0- $180,000
The correct answer is c. However, I selected b. I understand the JE stated in the explanation:
DR: Retained Earnings $50,000
CR: Accumulated Depreciation $50,000
However, I do not understand why Year 2’s depreciation decreased by $25,000 (amount of one year deprecation). Retained earnings will already show the accumulated error of $50,000 ($25,000 for year 1 and year 2). It seems that if net income were to reflect a decrease in $25,000 as well, depreciation would be recorded twice for Year 2 (once in RE earnings and another time in net income).
Could someone please help me understand why Year 2’s depreciation appears to be recorded twice? What am I missing (besides a social life)?
FAR
AUD
BEC - 11/19/2011
REG
- The topic ‘FAR Review – Error Correction Adjustment Confusion’ is closed to new replies.