Question

In 2023, the Berryhill Company discovers a self-correcting error made in 2021, affecting 2021 and 2022 Net Incomes. The 2022 books are closed. Accounting for the error correction will include:

Select one:

a. An adjustment to Retained Earnings, but not a Restatement of prior-year presented financial statements

b. A Restatement of prior-year presented financial statements, but not an adjustment to Retained Earnings

c. Both an adjustment to Retained Earnings and a Restatement of prior-year presented financial statements

d. Neither an adjustment to Retained Earnings nor a Restatement of prior-year presented financial statements

Answer 1

The correct answer is "b. A Restatement of prior-year presented financial statements, but not an adjustment to Retained Earnings".

Supporting explanations:

The concept of Prior period adjustments states that if there are any errors were made previous periods but those errors were identified in later periods as given in the question then such adjustments should be done to the prior period financial statements only but not to the current period statements. The reason is that when the prior period financial statements were fixed then automatically the current period statements will get fixed as the balance of retained earnings is being carried forwarded from previous years to current years.

Therefore, the adjustment is made to the retained earnings balance in prior period financial statements but no adjustment is made to the retained earnings.