error correction answer key[1]

error correction answer key[1] - ERROR CORRECTION...

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ERROR CORRECTION MULTIPLE-CHOICE ANSWERS 1. a __ __ 4. b __ __ 7. b __ __ 10. c __ __ 2. c __ __ 5. a __ __ 8. b __ __ 11. d __ __ 3. b __ __ 6. c __ __ 9. d __ __ MULTIPLE-CHOICE ANSWER EXPLANATIONS B. Error Correction 1. ( a ) The correct amount of 2010 interest expense is 2,040, as computed below. 11/1/2009 note Interest from 1/1/2010 to 10/31/2010 (5,000 x 12% x 10/12) 500 2/1/2010 note Interest from 2/1/2010 to 7/31/2010 (15,000 x 12% x 6/12) 900 5/1/2010 note Interest from 5/1/2010 to 12/31/2010 (8,000 x 12% x 8/12) 640 Total 2010 interest 2,040 Since interest expense of 1,500 was recorded, 2010 interest expense was understated by 540 (2,040 – 1,500). 2. ( c ) The error in understating the 2008 ending inventory would have reversed by 1/1/2010 (2008 income understated by 60,000; 2009 income overstated by 60,000). The error in overstating the 2009 ending inventory would not have been reversed by 1/1/2010. This error overstates both 2009 income and the 1/1/2010 retained earnings balance by 75,000. 3. ( b ) A correction of an error is treated as a prior period adjustment, recorded in the year the error is discovered, and is reported in the financial statements as an adjustment to the beginning balance of retained earnings. The adjustment is reported net of the related tax effect. In this case the net-of-tax effect is 28,000 [40,000 – (30% x 40,000)]. This should increase beginning retained earnings because the understatement of 12/31/2009 inventory would have resulted in an overstatement of cost of goods sold and therefore an understatement of retained earnings. Thus, the adjustment 1/1/2010 retained earnings is 178,000 (150,000 + 28,000). Tack’s journal entry to record the adjustment is Inventory 40,000 Retained earnings 28,000 Taxes payable 12,000 4. ( b ) A correction of an error is treated as a prior period adjustment and is reported in the
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