ERROR CORRECTIONMULTIPLE-CHOICE QUESTIONS (1-11)1 Loeb Corp frequently borrows from the bank in order to maintain sufficient operating cash The following loans were at a 12 interest rate with interest payable at maturity Loeb repaid each loan on its scheduled maturity dateDate of loan Amount Maturity date Term of loan1112009 5000 10312010 1 year212010 15000 7312010 6 months512010 8000 1312011 9 monthsLoeb records interest expense when the loans are repaid As a result interest expense of 1500 was recorded in 2010 If no correction is made by what amount would 2010 interest expense be understateda 540b 620c 640d 720

2 During 2010 Paul Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts

2008 $60000 understated2009 75000 overstated

Paul uses the periodic inventory system to ascertain year-end quantities that are converted to peso amounts using the FIFO cost method Prior to any adjustments for these errors and ignoring income taxes Paulrsquos retained earnings at January 1 2010 would bea Correctb 15000 overstatedc 75000 overstatedd 135000 overstated

3 Tack Inc reported a retained earnings balance of 150000 at December 31 2009 In June 2010 Tack discovered that merchandise costing 40000 had not been included in inventory in its 2009 financial statements Tack has a 30 tax rate What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31 2010a 190000b 178000c 150000d 122000

4 Conn Co reported a retained earnings balance of 400000 at December 31 2009 In August 2010 Conn determined that insurance premiums of 60000 for the three-year period beginning January 1 2009 had been paid and fully expensed in 2009 Conn has a 30 income tax rate What amount should Conn report as adjusted beginning retained earnings in its 2010 statement of retained earningsa 420000b 428000c 440000d 442000

5 Lore Co changed from the cash basis of accounting to the accrual basis of accounting during 2010 The cumulative effect of this change should be reported in Lorersquos 2010 financial statements as aa Prior period adjustment resulting from the correction of an errorb Prior period adjustment resulting from the change in accounting principlec Component of income before extraordinary itemd Component of income after extraordinary item

6 Bren Corsquos beginning inventory at January 1 2010 was understated by 26000 and its ending inventory was overstated by 52000 As a result Brenrsquos cost of goods sold for 2010 wasa Understated by 26000b Overstated by 26000c Understated by 78000d Overstated by 78000

7 On January 2 2010 Air Inc agreed to pay its former president 300000 under a deferred compensation arrangement Air should have recorded this expense in 2009 but did not do so Airrsquos reported income tax expense would have been 70000 lower in 2009 had it properly accrued this deferred compensation In its December 31 2010 financial statements Air should adjust the beginning balance of its retained earnings by aa230000 creditb230000 debitc300000 creditd370000 debit

8 Net income is understated if in the first year estimated salvage value is excluded from the depreciation computation when using the Straight-line method Production or use methoda Yes Nob Yes Yesc No Nod No Yes

9 At the end of 2009 Ritzcar Co failed to accrue sales commissions earned during 2009 but paid in 2010 The error was not repeated in 2010 What was the effect of this error on 2009 ending working capital and on the 2010 ending retained earnings balance

2009 ending working capital 2010ending retained earningsa Overstated Overstatedb No effect Overstatedc No effect No effectd Overstated No effect

10 On December 31 2010 special insurance costs were incurred and unpaid but were not recorded If these insurance costs were related to a particular job order in work in process that was not completed during the period what is the effect of the omission on accrued liabilities and retained earnings in the December 31 2010 balance sheetAccrued liabilities Retained earningsa No effect No effectb No effect Overstatedc Understated No effectd Understated Overstated

11 Which of the following errors could result in an overstatement of both current assets and stockholdersrsquo equitya An understatement of accrued sales expensesb Noncurrent note receivable principal is misclassified as a current assetc Annual depreciation on manufacturing machinery is understatedd Holiday pay expense for administrative employees is misclassified as manufacturing overhead

SIMULATION PROBLEMSThe auditors of Cardiff Company have found the following errors in the companyrsquos accounting recordsIndicate how the error will affect the current yearrsquos financial statements by choosing an ldquoOrdquo in the column for overstate and ldquoUrdquo in the column for understate

Assets Liabilities Retained earnings Net income Other comprehensive income

(O) (U) (O) (U) (O) (U) (O) (U) (O) (U)1 Cardiff fails to record a sale onaccount for 80000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

2 The inventory was miscounted atyear-end and overstated by 5000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

3 Cardiff fails to record depreciationexpense of 3500 for the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

4 The company receives a utility billfor 400 on December 29 but failsto record the bill 10486991048699 10486991048699 10486991048699 10486991048699 104869910486995 Available-for-sale securities werenot marked to market Later analysisreveals that the securities increasedin value by 4000 as of theend of the current year 10486991048699 10486991048699 10486991048699 10486991048699 104869910486996 Cardiff fails to accrue wages of17000 at the end of the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

7 Trading securities were not markedto market Later analysis revealsthat the securities declined in valueby $8000 as of the end of the currentyear 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

4 Conn Co reported a retained earnings balance of 400000 at December 31 2009 In August 2010 Conn determined that insurance premiums of 60000 for the three-year period beginning January 1 2009 had been paid and fully expensed in 2009 Conn has a 30 income tax rate What amount should Conn report as adjusted beginning retained earnings in its 2010 statement of retained earningsa 420000b 428000c 440000d 442000

5 Lore Co changed from the cash basis of accounting to the accrual basis of accounting during 2010 The cumulative effect of this change should be reported in Lorersquos 2010 financial statements as aa Prior period adjustment resulting from the correction of an errorb Prior period adjustment resulting from the change in accounting principlec Component of income before extraordinary itemd Component of income after extraordinary item

6 Bren Corsquos beginning inventory at January 1 2010 was understated by 26000 and its ending inventory was overstated by 52000 As a result Brenrsquos cost of goods sold for 2010 wasa Understated by 26000b Overstated by 26000c Understated by 78000d Overstated by 78000

7 On January 2 2010 Air Inc agreed to pay its former president 300000 under a deferred compensation arrangement Air should have recorded this expense in 2009 but did not do so Airrsquos reported income tax expense would have been 70000 lower in 2009 had it properly accrued this deferred compensation In its December 31 2010 financial statements Air should adjust the beginning balance of its retained earnings by aa230000 creditb230000 debitc300000 creditd370000 debit

8 Net income is understated if in the first year estimated salvage value is excluded from the depreciation computation when using the Straight-line method Production or use methoda Yes Nob Yes Yesc No Nod No Yes

9 At the end of 2009 Ritzcar Co failed to accrue sales commissions earned during 2009 but paid in 2010 The error was not repeated in 2010 What was the effect of this error on 2009 ending working capital and on the 2010 ending retained earnings balance

2009 ending working capital 2010ending retained earningsa Overstated Overstatedb No effect Overstatedc No effect No effectd Overstated No effect

10 On December 31 2010 special insurance costs were incurred and unpaid but were not recorded If these insurance costs were related to a particular job order in work in process that was not completed during the period what is the effect of the omission on accrued liabilities and retained earnings in the December 31 2010 balance sheetAccrued liabilities Retained earningsa No effect No effectb No effect Overstatedc Understated No effectd Understated Overstated

11 Which of the following errors could result in an overstatement of both current assets and stockholdersrsquo equitya An understatement of accrued sales expensesb Noncurrent note receivable principal is misclassified as a current assetc Annual depreciation on manufacturing machinery is understatedd Holiday pay expense for administrative employees is misclassified as manufacturing overhead

SIMULATION PROBLEMSThe auditors of Cardiff Company have found the following errors in the companyrsquos accounting recordsIndicate how the error will affect the current yearrsquos financial statements by choosing an ldquoOrdquo in the column for overstate and ldquoUrdquo in the column for understate

Assets Liabilities Retained earnings Net income Other comprehensive income

(O) (U) (O) (U) (O) (U) (O) (U) (O) (U)1 Cardiff fails to record a sale onaccount for 80000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

2 The inventory was miscounted atyear-end and overstated by 5000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

3 Cardiff fails to record depreciationexpense of 3500 for the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

4 The company receives a utility billfor 400 on December 29 but failsto record the bill 10486991048699 10486991048699 10486991048699 10486991048699 104869910486995 Available-for-sale securities werenot marked to market Later analysisreveals that the securities increasedin value by 4000 as of theend of the current year 10486991048699 10486991048699 10486991048699 10486991048699 104869910486996 Cardiff fails to accrue wages of17000 at the end of the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

7 Trading securities were not markedto market Later analysis revealsthat the securities declined in valueby $8000 as of the end of the currentyear 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

8 Net income is understated if in the first year estimated salvage value is excluded from the depreciation computation when using the Straight-line method Production or use methoda Yes Nob Yes Yesc No Nod No Yes

9 At the end of 2009 Ritzcar Co failed to accrue sales commissions earned during 2009 but paid in 2010 The error was not repeated in 2010 What was the effect of this error on 2009 ending working capital and on the 2010 ending retained earnings balance

2009 ending working capital 2010ending retained earningsa Overstated Overstatedb No effect Overstatedc No effect No effectd Overstated No effect

10 On December 31 2010 special insurance costs were incurred and unpaid but were not recorded If these insurance costs were related to a particular job order in work in process that was not completed during the period what is the effect of the omission on accrued liabilities and retained earnings in the December 31 2010 balance sheetAccrued liabilities Retained earningsa No effect No effectb No effect Overstatedc Understated No effectd Understated Overstated

11 Which of the following errors could result in an overstatement of both current assets and stockholdersrsquo equitya An understatement of accrued sales expensesb Noncurrent note receivable principal is misclassified as a current assetc Annual depreciation on manufacturing machinery is understatedd Holiday pay expense for administrative employees is misclassified as manufacturing overhead

SIMULATION PROBLEMSThe auditors of Cardiff Company have found the following errors in the companyrsquos accounting recordsIndicate how the error will affect the current yearrsquos financial statements by choosing an ldquoOrdquo in the column for overstate and ldquoUrdquo in the column for understate

Assets Liabilities Retained earnings Net income Other comprehensive income

(O) (U) (O) (U) (O) (U) (O) (U) (O) (U)1 Cardiff fails to record a sale onaccount for 80000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

2 The inventory was miscounted atyear-end and overstated by 5000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

3 Cardiff fails to record depreciationexpense of 3500 for the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

4 The company receives a utility billfor 400 on December 29 but failsto record the bill 10486991048699 10486991048699 10486991048699 10486991048699 104869910486995 Available-for-sale securities werenot marked to market Later analysisreveals that the securities increasedin value by 4000 as of theend of the current year 10486991048699 10486991048699 10486991048699 10486991048699 104869910486996 Cardiff fails to accrue wages of17000 at the end of the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

7 Trading securities were not markedto market Later analysis revealsthat the securities declined in valueby $8000 as of the end of the currentyear 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

SIMULATION PROBLEMSThe auditors of Cardiff Company have found the following errors in the companyrsquos accounting recordsIndicate how the error will affect the current yearrsquos financial statements by choosing an ldquoOrdquo in the column for overstate and ldquoUrdquo in the column for understate

Assets Liabilities Retained earnings Net income Other comprehensive income

(O) (U) (O) (U) (O) (U) (O) (U) (O) (U)1 Cardiff fails to record a sale onaccount for 80000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

2 The inventory was miscounted atyear-end and overstated by 5000 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

3 Cardiff fails to record depreciationexpense of 3500 for the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

4 The company receives a utility billfor 400 on December 29 but failsto record the bill 10486991048699 10486991048699 10486991048699 10486991048699 104869910486995 Available-for-sale securities werenot marked to market Later analysisreveals that the securities increasedin value by 4000 as of theend of the current year 10486991048699 10486991048699 10486991048699 10486991048699 104869910486996 Cardiff fails to accrue wages of17000 at the end of the year 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699

7 Trading securities were not markedto market Later analysis revealsthat the securities declined in valueby $8000 as of the end of the currentyear 10486991048699 10486991048699 10486991048699 10486991048699 10486991048699