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ERROR CORRECTION

MULTIPLE-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 date.
Date of loan Amount Maturity date Term of loan
11/1/2009 5,000 10/31/2010 1 year
2/1/2010 15,000 7/31/2010 6 months
5/1/2010 8,000 1/31/2011 9 months
Loeb records interest expense when the loans are repaid. As a result, interest expense of 1,500 was recorded in 2010. If no correction
is made, by what amount would 2010 interest expense be understated?
a. 540
b. 620
c. 640
d. 720

2. During 2010, Paul Company discovered that the ending inventories reported on its financial statements were incorrect by the
following amounts:
2008 $60,000 understated
2009 75,000 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, Pauls retained earnings at January 1, 2010, would be
a. Correct.
b. 15,000 overstated.
c. 75,000 overstated.
d. 135,000 overstated.

3. Tack, Inc. reported a retained earnings balance of 150,000 at December 31, 2009. In June 2010, Tack discovered that merchandise
costing 40,000 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, 2010?
a. 190,000
b. 178,000
c. 150,000
d. 122,000

4. Conn Co. reported a retained earnings balance of 400,000 at December 31, 2009. In August 2010, Conn determined that insurance
premiums of 60,000 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 earnings?
a. 420,000
b. 428,000
c. 440,000
d. 442,000

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 Lores 2010 financial statements as a
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting principle.
c. Component of income before extraordinary item.
d. Component of income after extraordinary item.

6. Bren Co.s beginning inventory at January 1, 2010, was understated by 26,000, and its ending inventory was overstated by 52,000.
As a result, Brens cost of goods sold for 2010 was
a. Understated by 26,000.
b. Overstated by 26,000.
c. Understated by 78,000.
d. Overstated by 78,000.

7. On January 2, 2010, Air, Inc. agreed to pay its former president 300,000 under a deferred compensation arrangement. Air should
have recorded this expense in 2009 but did not do so. Airs reported income tax expense would have been 70,000 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 a
a.230,000 credit.
b.230,000 debit.
c.300,000 credit.
d.370,000 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 method
a. Yes No
b. Yes Yes
c. No No
d. 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 earnings
a. Overstated Overstated
b. No effect Overstated
c. No effect No effect
d. 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 sheet?
Accrued liabilities Retained earnings
a. No effect No effect
b. No effect Overstated
c. Understated No effect
d. Understated Overstated

11. Which of the following errors could result in an overstatement of both current assets and stockholders equity?
a. An understatement of accrued sales expenses.
b. Noncurrent note receivable principal is misclassified as a current asset.
c. Annual depreciation on manufacturing machinery is understated.
d. Holiday pay expense for administrative employees is misclassified as manufacturing overhead.



SIMULATION PROBLEMS
The auditors of Cardiff Company have found the following errors in the companys accounting records.
Indicate how the error will affect the current years financial statements by choosing an O in the column for overstate and
U 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 on
account for 80,000.

2. The inventory was miscounted at
year-end and overstated by 5,000.

3. Cardiff fails to record depreciation
expense of 3,500 for the year.

4. The company receives a utility bill
for 400 on December 29, but fails
to record the bill.

5. Available-for-sale securities were
not marked to market. Later analysis
reveals that the securities increased
in value by 4,000 as of the
end of the current year.

6. Cardiff fails to accrue wages of
17,000 at the end of the year.

7. Trading securities were not marked
to market. Later analysis reveals
that the securities declined in value
by $8,000 as of the end of the current
year.

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