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 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 since it relates to a prior period's financial statement. It should be presented as an adjustment to the beginning balance of retained earnings in the year in which the error is discovered. This will not affect the current year's income statement or current year's retained earnings balance.

Watts Corporation Made a Very Large Arithmetical Error in the Preparation