Quiz - ERROR CORRECTION

MCQ (1 point Each)

1. Failure to record the expired amount of prepaid rent expense would not

a. understate expense

b. overstates net income

c. overstates owners’ equity

d. understate liability

Answer: d. understate liability

2. Failure to record accrued salaries at the end of an accounting period results in

a. overstated retained earnings

b. overstated assets

c. overstated liabilities

d. understated retained earnings

Answer: a. overstated retained earnings

3. Failure to record depreciation expense at the end of an accounting period results in

a. understated income

b. understated assets

c. overstated expenses

d. overstated assets

Answer: d. overstated assets

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4. Which of the following would cause income of the current period to be understated?

a. capitalizing research and development cost

b. failure to recognize unearned rent revenue

c. changing from weighted average to FIFO for merchandise inventory

d. understating estimate of residual value

Answer: d. understating estimate of residual value

5. Which of the following is a counterbalancing error?

a. understated depletion expense

b. bond premium under-amortized

c. prepaid expense adjusted incorrectly

d. overstated depreciation expense

Answer: c. prepaid expense adjusted incorrectly

6.Which of the following errors will not self-correct in the next year?

a. accrued expense not recognized at year-end

b. accrued revenue not recognized at year-end

c. depreciation expense overstated for the year

d. prepaid expense not recognized at year-end

Answer: c. depreciation expense overstated for the year

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7. Which of the following, if discovered in the accounting period subsequent to the
period of occurrence, should be reported as correction of an error?

a. the estimate of useful life of a depreciable asset should have been revised

b. a change from double declining to straight line depreciation

c. capitalization of an expense

d. change in percentage of sales

Answer: c. capitalization of an expense

8. Which of the following would cause income to be overstated in the period of

occurrence?

a. overestimating bad debt expense

b. understating beginning inventory

c. overstated purchases

d. understated ending inventory

Answer: b. understating beginning inventory

Problem Solving (2pts. Each)

1. JUICE WRLD company’s statements for 2019 and 2020 included errors as follows:

2019 depreciation understated by 30,000

2020 depreciation overstated by 50,000

Net income for 2019 and 2020 is 400,000 and 380,000, respectively. Both errors were
discovered in 2020.

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What is the corrected net income for 2020?

a. 460,000

b. 430,000

c. 410,000

d. 450,000

Answer: b. 430,000

2. JUICE WRLD company’s statements for 2019 and 2020 included errors as follows:

2019 depreciation understated by 30,000

2020 depreciation overstated by 50,000

Net income for 2019 and 2020 is 400,000 and 380,000, respectively. Both errors were
discovered in 2020.

Ignoring income taxes, what was the effect on retained earnings on January 1,
2021?

a. increased by 60,000

b. decreased by 60,000

c. increased by 20,000

d. decreased by 20,000

Answer: c. increased by 20,000

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1 and 2 Solution:

ERROR 2019 2020 EFFECT ON RETAINED

EARNINGS
Net income per book 400,000 380,000
Depreciation (30,000) (30,000)
understated
Depreciation 50,000 50,000
overstated
Corrected net income 370,000 430,000 20,000

Retained earnings opening balance in 2021 must be increased by 20,000 due to prior
period errors committed.

3. BOOM company reported the following net income:

2019 3,000,000

2020 3,250,000

In the determination of the net income, the following items are ignored:

2019 2020

Prepaid insurance 30,000 75,000

Accrued salaries 35,000 100,000

Unearned rental income 105,000 225,000

Accrued interest receivable 140,000 200,000

Moreover, in 2020 it was discovered that the ending inventories reported on its financial
statements were incorrect by the following amounts:

2019 30,000 understated

2020 90,000 overstated

What is the corrected net income for 2020?

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a. 3,030,000

b. 3,050,000

c. 3,000,000

d. 3,100,000

Answer: b. 3,050,000

4. BOOM company reported the following net income:

2019 3,000,000

2020 3,250,000

In the determination of the net income, the following items are ignored:

2019 2020

Prepaid insurance 30,000 75,000

Accrued salaries 35,000 100,000

Unearned rental income 105,000 225,000

Accrued interest receivable 140,000 200,000

Moreover, in 2020 it was discovered that the ending inventories reported on its financial
statements were incorrect by the following amounts:

2019 30,000 understated

2020 90,000 overstated

Ignoring income taxes, what was the effect on retained earnings on January 1,
2021?

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a. decreased by 170,000

b. increased by 170,000

c. decreased by 150,000

d. increased by 150,000

Answer: a. decreased by 170,000

3 and 4 Solution:

ERROR 2019 2020 Effect on Retained

Earnings
Net income per book 3,000,000 3,250,000
Omission of Prepaid Insurance:
2019 30,000 (30,000) -
2020 75,000 75,000
Omission of accrued salaries:
2019 (35,000) 35,000 -
2020 (100,000) (100,000)
Omission of unearned rent:
2019 (105,000) 105,000 -
2020 (225,000) (225,000)
Omission of interest receivable:
2019 140,000 (140,000) -
2020 200,000 200,000
Inventory in 2019 30,000 (30,000) (30,000)
understated
Inventory in 2020 (90,000) (90,000)
overstated
Corrected net income 3,060,000 3,050,000 (170,000)

The retained earnings opening balance in 2021 must be decreased by 170,000 due to
prior period errors committed.

5. ABED company’s statements for 2019 and 2020 included errors as follows:

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 2019 depreciation understated by 20,000

2020 depreciation overstated by 40,000

Net income for 2019 and 2020 is 100,000 and 280,000, respectively. Both errors were
discovered in 2020.

What is the corrected net income for 2020?

a. 300,000

b. 320,000

c. 340,000

d. 360,000

Answer: b. 320,000

6. ABED company’s statements for 2019 and 2020 included errors as follows:

2019 depreciation understated by 20,000

2020 depreciation overstated by 40,000

Net income for 2019 and 2020 is 100,000 and 280,000, respectively. Both errors were
discovered in 2020.

Ignoring income taxes, what was the effect on retained earnings on January 1,
2021?

a. increased by 10,000

b. decreased by 15,000

c. increased by 20,000

d. decreased by 25,000

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 Answer: c. increased by 20,000

5 and 6 Solution:

ERROR 2019 2020 EFFECT ON RETAINED

EARNINGS
Net income per book 100,000 280,000
Depreciation (20,000) (20,000)
understated
Depreciation 40,000 40,000
overstated
Corrected net income 80,000 320,000 20,000

Retained earnings opening balance in 2021 must be increased by 20,000 due to prior
period errors committed.

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