The Year 1 financial statements of Bice Company reported net income for the year

Question

The Year 1 financial statements of Bice Company reported net income for the year ended December 31, Year 1, of $2 million. On July 1, Year 2, subsequent to the issuance of the Year 1 financial statements, Bice changed from an accounting principle that is not generally accepted to one that is generally accepted. If the generally accepted accounting principle had been used in Year 1, net income for the year ended December 31, Year 1, would have been decreased by $1 million. On August 1, Year 2, Bice discovered a mathematical error relating to its Year 1 financial statements. If this error had been discovered in Year 1, net income for the year ended December 31, Year 1, would have been increased by $500,000. What amount, if any, should be included in net income for the year ended December 31, Year 2, because of the items noted above? A. $1,000,000 decrease. B. $500,000 increase. C. $0. D. $500,000 decrease. The Year 1 financial statements of Bice Company reported net income for the year ended December 31, Year 1, of $2 million. On July 1, Year 2, subsequent to the issuance of the Year 1 financial statements, Bice changed from an accounting principle that is not generally accepted to one that is generally accepted. If the generally accepted accounting principle had been used in Year 1, net income for the year ended December 31, Year 1, would have been decreased by $1 million. On August 1, Year 2, Bice discovered a mathematical error relating to its Year 1 financial statements. If this error had been discovered in Year 1, net income for the year ended December 31, Year 1, would have been increased by $500,000. What amount, if any, should be included in net income for the year ended December 31, Year 2, because of the items noted above? A. $1,000,000 decrease. B. $500,000 increase. C. $0. D. $500,000 decrease.

Explanation / Answer

The change from an unacceptable accounting principle to an acceptable accounting principle is considered a correction of an error per APB 20. Thus both of these items are corrections of errors and as such are reported as prior period adjustments. Prior period adjustments are reported in the retained earnings statement and not in the income statement (SFAS 16). Thus 2004 earnings are not affected by the aforementioned items.

The amount, if any that should be included in net income for the year ended December 31, Year 2, because of the items noted above is:

C. $0

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