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01 Error Correction
01 Error Correction
4. Conn Co. reported a retained earnings balance of 400,000 at December 31, 2009. In August 2010, Conn determined that insurance
premiums of 60,000 for the three-year period beginning January 1, 2009, had been paid and fully expensed in 2009. Conn has a 30%
income tax rate. What amount should Conn report as adjusted beginning retained earnings in its 2010 statement of retained earnings?
a. 420,000
b. 428,000
c. 440,000
d. 442,000
5. Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 2010. The cumulative effect of this
change should be reported in Lores 2010 financial statements as a
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting principle.
c. Component of income before extraordinary item.
d. Component of income after extraordinary item.
6. Bren Co.s beginning inventory at January 1, 2010, was understated by 26,000, and its ending inventory was overstated by 52,000.
As a result, Brens cost of goods sold for 2010 was
a. Understated by 26,000.
b. Overstated by 26,000.
c. Understated by 78,000.
d. Overstated by 78,000.
7. On January 2, 2010, Air, Inc. agreed to pay its former president 300,000 under a deferred compensation arrangement. Air should
have recorded this expense in 2009 but did not do so. Airs reported income tax expense would have been 70,000 lower in 2009 had it
properly accrued this deferred compensation. In its December 31, 2010 financial statements, Air should adjust the beginning balance
of its retained earnings by a
a.230,000 credit.
b.230,000 debit.
c.300,000 credit.
d.370,000 debit.
8. Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the
Straight-line method, Production or use method
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
9. At the end of 2009, Ritzcar Co. failed to accrue sales commissions earned during 2009 but paid in 2010. The error was not repeated
in 2010. What was the effect of this error on 2009 ending working capital and on the 2010 ending retained earnings balance?
2009 ending working capital
2010ending retained earnings
a.
Overstated
Overstated
b.
No effect
Overstated
c.
No effect
No effect
d.
Overstated
No effect
10. On December 31, 2010, special insurance costs were incurred and unpaid, but were not recorded. If these insurance costs were
related to a particular job order in work in process that was not completed during the period, what is the effect of the omission on
accrued liabilities and retained earnings in the December 31, 2010 balance sheet?
Accrued liabilities Retained earnings
a. No effect
No effect
b. No effect
Overstated
c. Understated
No effect
d. Understated
Overstated
11. Which of the following errors could result in an overstatement of both current assets and stockholders equity?
a. An understatement of accrued sales expenses.
b. Noncurrent note receivable principal is misclassified as a current asset.
c. Annual depreciation on manufacturing machinery is understated.
d. Holiday pay expense for administrative employees is misclassified as manufacturing overhead.
SIMULATION PROBLEMS
The auditors of Cardiff Company have found the following errors in the companys accounting records.
Indicate how the error will affect the current years financial statements by choosing an O in the column for overstate and
U in the column for understate.
Assets
Liabilities
(O) (U)
(O) (U)
Retained earnings
Net income
(O) (U)
(O) (U)
Other
comprehensive income
(O) (U)