Explain whether Colston Company correctly reported the following items in the financial statements:a. In a recent year, the company discovered a clerical error in the prior year’s accounting records. As a result, the reported net income for the previous year was overstated by $45,000. The company corrected this error by restating the prior-year financial statements.b. In a recent year, the company voluntarily changed its method of accounting for longterm construction contracts from the percentage of completion method to the completed contract method. Both methods are acceptable under generally acceptable accounting principles. The cumulative effect of this change was reported as a separate componentof income in the current period income statement.

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Asked Jan 2, 2020
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Explain whether Colston Company correctly reported the following items in the financial statements:
a. In a recent year, the company discovered a clerical error in the prior year’s accounting records. As a result, the reported net income for the previous year was overstated by $45,000. The company corrected this error by restating the prior-year financial statements.
b. In a recent year, the company voluntarily changed its method of accounting for longterm construction contracts from the percentage of completion method to the completed contract method. Both methods are acceptable under generally acceptable accounting principles. The cumulative effect of this change was reported as a separate component
of income in the current period income statement.

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Expert Answer

Step 1

(a)

Extraordinary Items: There are times when a company faces unusual and infrequent gains and losses. These are accounted and reported as extraordinary items in the financial statement.

Examples:

  • Losses incurred due to natural calamities.
  • Company’s property taken by a foreign government authority
  • Items which do not recur in the foreseeable future

In this case when a clerical error of $45,000 (overstated) is detec...

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