When a Self-Correcting Error Is Discovered After Closing the Books

question 339

Multiple Choice

When a self-correcting error is discovered after closing the books for the second year ________.

• A)no entry is necessary because all permanent accounts are correctly stated
• B)an entry is necessary to correct the permanent accounts
• C)an entry must be made to correct both the income statement and balance sheet accounts
• D)a footnote disclosure with the financial statements is required describing the error

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Definitions:

Stock Dividend

A dividend payment made in the form of additional shares rather than a cash payout.

Stock Split

An increase in a firm’s shares outstanding without any change in owner’s equity.

Retained Earnings

Profit that is not distributed to the shareholders but is kept by the company for future investment or to pay off debt.