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Discussion:Accounting Errors Question (homework q)

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Discussion Forum Index --> Consumer Questions --> Accounting Errors Question (homework q)


Kwakkles (talk|edits) said:

4 May 2008
I took a 34-question multiple choice paper exam for my class called, "Financial Accounting Concepts," at my college a few weeks ago. The exam was the first of three in the spring 2008 semester. Out of the 34, I got one question wrong, and I wrote it down while my instructor was reviewing the handed-back, graded exams. I know how to do it now. This is that one question:


3. Tack, Inc reported a retained earnings balance of $200,000 at December 31, 2008. In June 2009, Tack discovered that merchandise costing $70,000 had not been included in inventory in its 2008 financial statements. Also, a $20,000 prepaid expense was omitted on 12/31/07. Tack has a 20% tax rate. Assuming the correcting journal entry net of tax was recorded, what amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings?

a. $272,000 b. $270,000 c. $160,000 d. $144,000 e. $256,000

Uncle Sam (talk|edits) said:

4 May 2008
So - you're expecting us to give you the answer?

This isn't a homework or test helper site. Ask your instructor.

BEGooding (talk|edits) said:

May 4, 2008
Sound it out! If $70k of inventory had been charged to expense instead of capitalizing it, would that adjustment increase profit or decrease it?

If $20,000 of prepaid expenses had been charged to expense when it should have been capitalized, would that adjustment increase profit or decrease it?

If $90,000 shows up on the balance sheet instead of being charged to expense, at a 20% tax rate, would that increase tax by $18k or decrease it?

See! Even you can speak accounting!

Kwakkles (talk|edits) said:

9 May 2008
Uncle Sam, you don't know how to this problem, do you? I posted this question to test those who come to this forum, testing skills accounting skills you may not have used recently. I don't care if you solved it or even knew how to, as it's just something to think about.

The answer is "E. $256,000." $14,000 would be credit to Income Tax Payable.

BEGooding (talk|edits) said:

May 9, 2008
Watch it Kwakkles. Uncle Sam is a major contributor to the discussions on this forum. We get tired of students that come here under false pretenses to get answers to their homework questions. If you are not a tax and/or accounting professional, your contributions are not welcome here.

Uncle Sam (talk|edits) said:

9 May 2008
Thank you BE - I am pleased when there are others on this board who share my views.

DZCPA (talk|edits) said:

10 May 2008
I agree. Some of the students posting here can be jerks!

Bushmaster (talk|edits) said:

15 May 2008
I disagree with kwakkles answer BTW.

BEGooding (talk|edits) said:

May 15, 2008
So do I...good catch Bush.

LemRI (talk|edits) said:

May 16, 2008
Well, my only question is regarding PPE. If it was omitted, I'm assuming it's talking about the B/S because it'd follow the likeness of the inventory example (part one). If not, then there is no answer here...

3. Tack, Inc reported a retained earnings balance of $200,000 at December 31, 2008. In June 2009, Tack discovered that merchandise costing $70,000 had not been included in inventory in its 2008 financial statements. Also, a $20,000 prepaid expense was omitted on 12/31/07. Tack has a 20% tax rate. Assuming the correcting journal entry net of tax was recorded, what amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings?

[1] Presumably this was expensed. DR Inventory/CR RE $70K from the beginning $200K RE. [+$14K taxes / $270 RE] [2] If PPE was ommited (from the B/S), it's on the I/S. DR PPE/CR RE $20K. [+$4K taxes / $290 RE] [3] Taking the tax into consideration, your RE of $290K is reduced by taxes of $18K, yielding $272K.

So the answer should be A. You stated it was E. How do you arrive at that?

Jim@LWR (talk|edits) said:

May 16, 2008
Check the dates. The omitted PPE was as of 12/31/07 so at 12/31/08 the error would have reversed itself. Kwakkles is correct the answer is $256,000.

LemRI (talk|edits) said:

May 16, 2008
Should have looked closer at the dates! Oops.

Bushmaster (talk|edits) said:

20 May 2008
I still disagree. Its NONE of the above. The adjustment would have to be made to 12/31/07 RE amount. There would be a 16,000 adjustment to the 12/31/07 RE. On 1/1/08, a correction of 16,000 would be carried over, which the beginning RE amount FYE 2008. The OP never states WHICH YEAR you are reporting. I can only deduct that the year that needs FIXING is 2008 and the beginning RE for that year would be $216,000, the balance on 1/1/08, and not any of the answers given.

Jim@LWR (talk|edits) said:

May 20, 2008
Bushmaster, you do make a valid point that the question is worded rather strangely. However, I assumed that the question is asking for the retained earnings balance as of 1/1/09. Your answer of $216,000 assumes that, except for the errors listed, the results for the year ended 12/31/08 were exactly zero income or loss. I think my assumption is more valid.

Bushmaster (talk|edits) said:

20 May 2008
The great thing about it is that in real life, neither one us will have to make any assumptions about it.

The prior year error (the 20k Prep Exp) net of tax would be a 16k adjustment to that balance, which (another assumption here) would be expensed in 2008. Then hte 70,000 adjustement to inventory, net of tax, would be 56,000. Kwakkles didn't understand the question or the answer because a complete answer would have included an explanation about WHICH year was being restated, WHICH year was NOT being restated, and an explanation why the 20k in prepaid was being disregarded (ie, only the 1/1/09 RE is being restated).

Taocpa (talk|edits) said:

20 May 2008
Who proofreads these exams?

The exams I remember taking would have said, "...what amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings as of January 1. 2008 (or 2009)?"

I would agree the question is vague as to which year to correct. Are you correcting 01/01/08 RE or 01/01/09 RE? In my opinion, better to go back and restate from 01/01/08.

I had an accounting professor who claimed the university I went to did a lousy job of teaching accounting students. He was was fond of saying, "We here at the accounting department of the University of XXXXXXXX are proud to teach you accounting in Greek and then test you in French!"

Tom

Actionbsns (talk|edits) said:

20 May 2008
Wow! I can tell tax season is over!

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