Chapter 21, Problem 1JC

Cases Judgment Case

Judgment Case: Materiality and Error Corrections

SAB Topic 1 M., Assessing Materiality, found in FASB ASC 250-10-S99-1, presents the SEC’s views on the issue of materiality in the financial statements. Based on this document, indicate whether each of the following errors is material and thus should be corrected.

1. 1. Talky Solutions discovered several large errors. One error overstates inventory and understates cost of goods sold by 8% of uncorrected net income. The other error understates sales revenue and understates accounts receivable by 8.5% of uncorrected net income. Consequently, the two errors combined result in a slight understatement of net income.
2. 2. Net income for the current year for Walker Electric is $1,500,000. It has discovered an error that affects its contingent liability account in the amount of $35,000. The error understates the liability account and overstates net income. Walker has also discovered an error that affects its accounts payable account in the amount of $35,000. The error understates the liability account and overstates net income.
3. 3. Net income for CoCo Corporation is $7,000,000 in the current year. CoCo has a simple capital structure with 1,000.000 shares outstanding, so earnings per share is $7.00 per share. Earnings per share was $6.94 last year and $6.90 the year before that. Analyst forecasts for CoCo’s earnings per share this year will be $6 98 CoCo discovered an error of $40,000 that affects its inventory accounts and overstates net income.
4. 4. Net income for Soda, Inc is $5,000,000 in the current year. Soda has a simple capital structure with 1,000,000 shares outstanding, so earnings per share is $5 per share. Earnings per share was $4 95 last year and $4 93 the year before that Soda discovered an error of $20 000 in its estimate of bad debts that overstates income.