A company made an error in calculating and reporting amortization expense in Year 1.The error was discovered in Year 2.The item should be reported as a prior period adjustment:
A)on the Year 1 statement of retained earnings.
B)on the Year 1 income statement.
C)on the Year 2 statement of retained earnings.
D)on the Year 2 income statement.
E)accounted for with a cumulative "catch-up" adjustment in Year 2.

Question

Quizplus · Accepted Answer

A prior period adjustment reflects a correction to the financial statements of a prior period. In this case, the error was made in Year 1 but discovered in Year 2, so it should be reported as a prior period adjustment on the Year 2 statement of retained earnings. It would not be reported on the Year 1 statements because the error was not known at that time, and it would not be reported on the Year 2 income statement because it is not a current period expense. Option E is incorrect because it suggests that the adjustment would be spread over two years, which is not necessary in this case.

A Company Made an Error in Calculating and Reporting Amortization