Multiple Choice
A prior period adjustment requires an adjustment to which of the following accounts?
12. Stockholders' Equity
Retained Earnings: Prior Period Adjustments
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Which of the following should be reported as a prior period adjustment to retained earnings?
A
Correction of an error in last year's financial statements
B
Change in estimated useful life of equipment
C
Recording depreciation expense for the current year
D
Declaration of a cash dividend
Verified step by step guidance1
Understand the concept of a prior period adjustment: A prior period adjustment is a correction of an error in previously issued financial statements. It is reported directly in the retained earnings section of the equity statement, bypassing the income statement for the current period.
Analyze the options provided: Review each option to determine whether it qualifies as a prior period adjustment. Focus on whether the action involves correcting an error from a prior period.
Option 1: Correction of an error in last year's financial statements. This qualifies as a prior period adjustment because it involves fixing a mistake in previously issued financial statements.
Option 2: Change in estimated useful life of equipment. This does not qualify as a prior period adjustment because changes in estimates are accounted for prospectively, not retroactively.
Option 3 and 4: Recording depreciation expense for the current year and declaration of a cash dividend. Neither of these qualifies as a prior period adjustment because they are current period transactions and do not involve correcting prior period errors.
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