Watts 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 other expense item for the year in which the error was made.
D) a prior period adjustment.

Question

Quizplus · Accepted Answer

Correction of the error when discovered in the next year should be treated as a prior period adjustment. This is because the error affects a previous period's financial statements and therefore needs to be adjusted in the prior period's financial statements. Prior period adjustments are reported in the statement of retained earnings, not the income statement, and are fully explained in a note to the financial statements.

Watts Corporation Made a Very Large Arithmetical Error in the Preparation