Question

Watts Corporation made a very large arithmetical error in the preparation of its year-end point in the calculation of financial statements by improper placement of a decimal depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as:____________. a. an increase in depreciation expense for the year in which the error is discovered b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements. c. a change in accounting principle for the year in which the error was made. d. a prior period adjustment.

Answer 1

Answer:

d. a prior period adjustment.

Explanation:

Correction of the error when discovered in the next year should be treated as a prior period adjustment. This is basically because the error was already recorded in the past financial report. Since these reports are final and cannot be changed, then the correction to this error needs to be implemented in the next year's financial report and would reflect on that year's income taxes. The process of doing this is known in accounting as a prior period adjustment