Question

The following situation occurred during 2016 for one of your audit clients, The Stride Well Company:

Discovery that depreciation expenses were omitted by accident from 2015’s income statement.

1.) Select one situation from above, and identify the appropriate reporting treatment from the list below (consider each event to be material):

As an unusual gain or loss.

As a prior period adjustment.

As a change in accounting principle.

As a discontinued operation.

As a change in accounting estimate.

As a change in accounting estimate achieved by a change in accounting principle.

2.) Explain how the situation would be included in the income statement

in continuing operations,

below continuing operations, or

appearing as an adjustment to retained earnings.

QUESTION:

I know that the reporting treatment would be considered as a prior year adjustment. What I do not know is how it would be incldued on the income statement. I believe it would be under retained earnings, but could I get an explaination as to why?

Answer 1