Shank 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. Correction of the error when discovered in the next year should be treated as
A) an increase in depreciation expense for the year in which the error is discovered.
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.
C) an extraordinary item for the year in which the error was made.
D) a prior period adjustment.

Question

Quizplus · Accepted Answer

This is a prior period adjustment because it corrects an error made in a previous year's financial statements. Adjustments of this nature are not included in the current year's income statement but are instead applied retroactively to the financial statements of the period in which the error occurred.

Shank Corporation Made a Very Large Arithmetical Error in the Preparation