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

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

a. In 2014, the company discovered a clerical error in the prior year’s accounting records. As a result, the reported net income for 2013 was overstated by $45,000. The company corrected this error by restating the prior-year financial statements.

b. In 2014, 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 2014 income statement.


Answer:
a. Colston Company reported this item correctly in the financial statements. This item is an error in the recognition, measurement, or presentation in the financial statements, which is correctly handled by retroactively restating prior-period earnings.

b. Colston Company did not report this item correctly. This item is a change from one generally accepted accounting principle to another, which is correctly handled by retroactively restating prior-period earnings. In this case, Colston reports this change cumulatively in the current period, which is incorrect.






Assume that the amount of each of the following items is material to the financial statements. Classify each item as either normally recurring (NR) or extraordinary (E).

a. Loss on the disposal of equipment considered to be obsolete because of the development of new technology.

b. Uninsured loss on building due to hurricane damage. The building was purchased by the company in 1910 and had not previously incurred hurricane damage.

c. Gain on sale of land condemned by the local government for a public works project.

d. Uninsured flood loss. (Flood insurance is unavailable because of periodic flooding in the area.)

e. Interest revenue on notes receivable.

f. Uncollectible accounts expense.

g. Loss on sale of investments in stocks and bonds.


Answer:
a. NR
b. E
c. E
d. NR
e. NR
f. NR
g. NR