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Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
ISBN: 9781337272124
Textbook Problem
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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

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

To report: Whether CC has reported the clerical error.

Explanation

CC has reported the correctness in the financial statements. Items are correctly reported and thus, there is error in the recognition...

(b)

To determine

To report: The change of method of accounting.

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