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Chapter 4: 14 (page 180)

How should correction of errors be reported in the financial statements?

Short Answer

Expert verified

In the financial statements, error correction is reported by adjusting to the beginning balance of retained earnings.

Step by step solution

01

Meaning of Retained Earnings

Retained earnings are the accumulated profits left after making dividend payments to the shareholders. A growth-focused company may retain these earnings in the business instead of distributing them to shareholders.

02

Explanation of reporting of correction of errors

Correction errors in prior period adjustments can be corrected by making the journal entries in the accounts. Correction of an error is recorded in the year the error has been discovered. In the financial statements, it is shown as the adjustments in the retained earnings balance in the beginning.

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Most popular questions from this chapter

The non-controlling interest section of the income statement is:

(a) required under GAAP but not under IFRS.

(b) required under IFRS but not under GAAP.

(c) required under IFRS and GAAP.

(d) not reported under GAAP or IFRS.

The following information was taken from the records of Roland Carlson Inc. for the year 2017: income tax applicable to income from continuing operations \(187,000, income tax applicable to loss on discontinued operations \)25,500, and unrealized holding gain on available-for-sale securities (net of tax) \(15,000.

Gain on sale of equipment \)95,000 Cash dividends declared $150,000

Loss on discontinued operations75,000 Retained earnings January1,2017 600,000

Administrative expenses 240,000 Cost of goods sold 850,000

Rent revenue 40,000 Selling expenses 300,000

Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2017 were 100,000.

Instructions

  1. Prepare a single-step income statement.
  2. Prepare a comprehensive income statement for 2017 using the two statement format.
  3. Prepare a retained earnings statement for 2017.

Which statement is correct regarding IFRS?

  1. An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary.
  2. The function-of-expense approach never requires arbitrary allocations.
  3. An advantage of the function-of-expense method is that the allocation of costs to the varying functions is rarely arbitrary.
  4. IFRS requires the use of the nature-of-expense approach.

Identify at least two situations in which important changes in value are not reported in the income statement.

Discuss the appropriate treatment in the financial statements of each of the following.

(a) Gain on sale of investment securities.

(b) A profit-sharing bonus to employees computed as a percentage of net income.

(c) Additional depreciation on factory machinery because of an error in computing depreciation for the previous year.

(d) Rent received from subletting a portion of the office space.

(e) A patent infringement suit, brought 2 years ago against the company by another company, was settled this year by a cash payment of $725,000.

(f) A reduction in the Allowance for Doubtful Accounts balance because the account appears to be considerably in excess of the probable loss from uncollectible receivables.
See all solutions

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