Requirement 1. Which of the following items requires a prior period adjustment t

Question

Requirement 1.

Which of the following items requires a prior period adjustment to accumulated other comprehensive income?

I. Available-for-sale securities were improperly valued last year by $3 million.
II. The prior year’s foreign currency translation gain of $1.5 million was never recorded.
III. Revenue of $4 million that should have been deferred was recorded in previous year as earned.

a. I, II, and III

b. I and II only

c. I and II only

d. II and III only

Requirement 2.

Choose the correct statement(s) regarding changes in accounting estimates:

I. Changes in accounting estimates generally result from the availability of new information.
II. Disclosure of current period effects is generally required for changes in estimate.
III. A change in accounting principle that is inseparable from a change in estimate is accounted for prospectively, but with footnote disclosure of retrospective effects.

a. I only.

b. I and II only.

c. III only.

d. II and III only.

Explanation / Answer

Items that will require a prior period adjustment to accumulated other comprehensive income are as follows:

Explanation for the above choice is explained in detail below:

Securities held in Available for sale(AFS) category are reported on the balance sheet date at their market value and any unrealized gain/losses are reported in Other comprehensive Income(OCI).As mentioned in the choice above they were improperly valued last year by $3 million, a correction to that effect will be required under accumulated other comprehensive income.

Translation is a process which is used when consolidating financial statements of a foreign subsidiary ,under that local currency (which is functional currency) is converted from foreign currency into US dollars.To balance the entry a translation adjustment is done in Other comprehensive Income.As mentioned in the choice prior year’s foreign currency translation gain of $1.5 million was never recorded, a correction to that effect would be a prior period adjustment to accumulated other comprehensive income.

The third choice Revenue of $4 million that should have been deferred was recorded in previous year as earned require adjustment in retained earnings as it affects Net Income and not other comprehensive income.

Items that will require a prior period adjustment to accumulated other comprehensive income are as follows:

Explanation for the above choice is explained in detail below:

Securities held in Available for sale(AFS) category are reported on the balance sheet date at their market value and any unrealized gain/losses are reported in Other comprehensive Income(OCI).As mentioned in the choice above they were improperly valued last year by $3 million, a correction to that effect will be required under accumulated other comprehensive income.

Translation is a process which is used when consolidating financial statements of a foreign subsidiary ,under that local currency (which is functional currency) is converted from foreign currency into US dollars.To balance the entry a translation adjustment is done in Other comprehensive Income.As mentioned in the choice prior year’s foreign currency translation gain of $1.5 million was never recorded, a correction to that effect would be a prior period adjustment to accumulated other comprehensive income.

The third choice Revenue of $4 million that should have been deferred was recorded in previous year as earned require adjustment in retained earnings as it affects Net Income and not other comprehensive income.

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