Watts Corporation made a very large arithmetical error in the preparation of its

Question

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. a. an increase in depreciation expense for the year in which the error is discovered Correction of the error when discovered in the next year should be treated as b. a component of income for the year in which the error is discovered , but separately listed on the income statement and fully explained in a note to the financial statements e a change in accounting principle for the year in which the error was made. d a prior period adjustment

Explanation / Answer

Answer - Prior period adjustment

Analysis

It is not change in accounting principle. It is generally change in provisions made, estimates used, changing method of valuation of Inventory.

It is prior period item.

prior period are those items which are recorded in current as income or expenses due to ommission or error in prior period financial statements

since in this case depreciation was wrongly reported as double hence such error would be reported as prior period item in current year financial statements

Particulars Explanation Point (a) Such method can not be adopted since it will violate the matching principle of accounting and accrual principle. Depreciation of previous year can not be reported directly just as expense of next year Point (b) Depreciation discovered in next year is not reported as income statement even if company gives full disclosures. Such depreciation is not part of revenue recognition to be reported as component of income Point (c)

It is not change in accounting principle. It is generally change in provisions made, estimates used, changing method of valuation of Inventory.

Point (d)

It is prior period item.

prior period are those items which are recorded in current as income or expenses due to ommission or error in prior period financial statements

since in this case depreciation was wrongly reported as double hence such error would be reported as prior period item in current year financial statements

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