Question

The next three questions are based on the following information: Strata Company is a retailer whose shares are publicly traded. During year X1, Strata reported the following quarterly financial information in its SEC filings: Quarter Q1 Q2 Q3 Q4 Pre-Tax Income 100,000 130,000 140,000 180,000 Taxes (20%) (20,000) (26,000) (28,000) (36,000) Net Income 80,000 104,000 112,000 144,000 As a retailer, Strata counts its inventory on 6/30 and 12/31 of each year. While observing Strata's inventory count on 12/31/X1 prior to closing, the auditor discovered that Strata's ending inventory count was overstated by $30,000 as it included goods received from Rapid Company that were being held on consignment. The auditor then went back to the inventory scan records that were made when Strata counted its inventory back on 6/30/X1 and discovered that the same $30,000 of goods being held on consignment had been counted when calculating Strata's ending inventory. As a corporation, Strata files quarterly tax returns with the IRS. In response to this information, what accounting entries if any should Strata make on 12/31/X1? Select one: a. Debit Cost of Sales for $30,000 and Credit Inventory for $30,000 b. Debit Cost of Sales for $24,000, Debit Tax Expense for $6,000 and Credit Inventory for $30,000 c. Debit Retained Earnings for $30,000 and Credit Inventory for $30,000 d. Debit Cost of Sales for $30,000, Debit Accounts Receivable $6,000, Credit Inventory for $30,000, and Credit Tax Expense for $6,000 e. None of the Above

Assume that P is a public Company that owns 90% of Strata and has previously filed consolidated financial statements for quarters Q1, Q2, and Q3 of year X1. Based on this information, what accounting entries should P make on 12/31/X1 when it is notified of the inventory counting problems? Select one: a. Debit Investment Income for $18,000 and Credit Investment in Strata for $18,000 b. Debit Investment Income for $21,600 and Credit Investment in Strata for $21,600 c. Debit Investment Income for $24,000 and Credit Investment in Strata for $24,000 d. Debit Retained Earnings for $24,000 and Credit Investment in Strata for $24,000 e. None of the Above Question 9

In addition to making correcting accounting entries, what additional responsibilities does P have under ASC 250 regarding its Investment in Strata? Select one: a. P is required to restate consolidated results for quarter Q2. b. P is required to restate consolidated results for quarter Q3. c. P is required to disclose the effects of the Strata error on previously reported results. d. All of the Above

Answer 1

Answer to Part 1

e. None of the Above

Reason: When inventory is overstated, then COGS is understated and Revenue is overstated which results in additional payment of tax than required. So, the additional tax amount have to be credited.

Journal entry:

Cost of Sales Dr. $30000

Retained Earnings Dr. $6000

To Inventory $30000

To Tax Expense $6000

Answer to Part 2

c. Debit Investment Income for $24,000 and Credit Investment in Strata for $24,000

Reason: As the inventory is overstated, the income earned is overstated and it should be reduced by the overstated amount.

Answer to Part 3

c. P is required to disclose the effects of the Strata error on previously reported results.

Reason: As per ASC 250 Accounting changes and error corrections following things need to disclosed:

1. The method of treating error correction in comparative statements for two or more years

2. Disclosure reequired when previously issued statements of income are restated

3. Recommends method of presentation of historical, statistical-type financial summaries that are affected by error corrections.