Discuss whether Colston Company correctly reported the following items in the financial statements:
a. In 2014, the company discovered a clerical error in the prior year’s accounting records. As a result, the reported net income for 2013 was overstated by $45,000. The company corrected this error by restating the prior-year financial statements.
b. In 2014, the company voluntarily changed its method of accounting for long-term construction contracts from the percentage of completion method to the completed contract method. Both methods are acceptable under generally acceptable accounting principles. The cumulative effect of this change was reported as a separate component of income in the 2014 income statement.
Answer:
a. Colston Company reported this item correctly in the financial statements. This item is an error in the recognition, measurement, or presentation in the financial statements, which is correctly handled by retroactively restating prior-period earnings.
b. Colston Company did not report this item correctly. This item is a change from one generally accepted accounting principle to another, which is correctly handled by retroactively restating prior-period earnings. In this case, Colston reports this change cumulatively in the current period, which is incorrect.