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    Cumulative effect of error

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    O7). Use the following information for questions I and II below.

    Rice Co. purchased machinery that cost $810,000 on January 4, 2006. The entire cost was recorded as an expense. The machinery has a nine-year life and a $54,000 residual value. The error was discovered on December 20, 2008. Ignore income tax considerations.

    I. Rice's income statement for the year ended December 31, 2008, should show the cumulative effect of this error in the amount of

    a. $726,000.
    b. $642,000.
    c. $558,000.
    d. $0.

    II. Before the correction was made, and before the books were closed on December 31, 2008, beginning of year 2007 Retained Earnings was understated by

    a. $810,000.
    b. $726,000.
    c. $642,000.
    d. $558,000.

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    Solution Preview

    I. d. $0.
    This error is not a change in accounting principle and so there would be no cumulative effect of this error. This would be corrected by correcting the beginning retained earnings amount.
    In the income statement ...

    Solution Summary

    The solution explains the correct alternative from the given options