Explain where each of the following items should appear in the financial statements of a corporation: (1) The accounting department discovered that an entry was made last year to Insurance Expense instead of to Prepaid Insurance. The after-tax effect of the charge to Insurance Expense was $5,000.(2) The company grants five of its employees the option to purchase 100 shares of its $5 par value common stock at its current market price of $20 per share anytime with the next five years. None of the employees exercised the options in the current year.
What will be an ideal response?
(1) This is an error that should be reported as a prior period adjustment. Accordingly, it should be reported in the statement of retained earnings, net of taxes, as a reduction from the beginning retained earnings balance.
(2) The cost of stock options is reported in the income statement.
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