Ending inventory for 2012 is overstated by $5,500 due to a faulty count and costing.The tax rate is 39%.Assume the same accounting methods for both financial reporting and taxes.The error is discovered late in 2014.The 2014 annual report shows the financial statements for 2012,2013,2014 on a comparative basis. Which of the following is correct regarding the reporting of this error in the 2014 annual report?
A) A journal entry is made to report the prior period adjustment,and the 2012 and 2013 statements are shown corrected.
B) No journal entry is needed,and the 2012 and 2013 statements are shown as they were in the 2013 annual report.
C) No journal entry is needed,and the 2012 and 2013 statements are shown corrected.
D) A journal entry is made to report the prior period adjustment,and the 2012 and 2013 statements are shown as they were in the 2013 annual report.

Question

Quizplus · Accepted Answer

When an error is discovered in previously issued financial statements, the correction is made by adjusting the beginning retained earnings of the earliest period presented in the comparative financial statements. No journal entry is made to correct the prior years directly. Instead, the financial statements for those years are restated to reflect the correction. This means the 2012 and 2013 financial statements shown in the 2014 annual report should be corrected to reflect the accurate ending inventory figures.

Ending Inventory for 2012 Is Overstated by $5,500 Due to a Faulty