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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Unusual items

Explain whether Colston Company correctly reported the following items in the financial statements:

  1. 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.
  2. b. In a recent year, the company voluntarily changed its method of accounting for long-term 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.

(a)

To determine

Ensure Company CC has reported right to rectify the clerical error.

Explanation

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

(b)

To determine

Ensure correct reporting of change in method of accounting.

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