Shank Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of 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)an extraordinary item for the year in which the error was made.
D)a prior period adjustment.

Question

Quizplus · Accepted Answer

The correction of the error should be treated as a prior period adjustment, which means it should be reported in the financial statements of the prior period in which the error was made, rather than the period in which it was discovered. This is because the error affected the accuracy of the financial statements in the prior period. The correction should be reported as an adjustment to beginning retained earnings, with a corresponding adjustment to net income for the current period to reflect the impact of the correction on the current period's financial statements.

Shank Corporation Made a Very Large Arithmetical Error in the Preparation