Question

Stanford Company leased some special-purpose equipment from Vincent Inc. under a long-term lease that was treated as an operating lease by Stanford. After the financial statements for the year had been issued, it was discovered that the lease should have been treated as a capital lease by Stanford. How should this error be corrected?

a) Restate the financial statements for the current year only
b) Restate the financial statements for the current year and adjust prior years' financial statements
c) Ignore the error as it is immaterial
d) Report the error as a footnote in the next year's financial statements

Answer 1

When an error is discovered in the treatment of a lease, it should be corrected by restating the financial statements for the current year and adjusting the prior years' financial statements.

Step-by-step explanation:

When an error is discovered in the treatment of a lease, it should be corrected by restating the financial statements for the current year and adjusting the prior years' financial statements. This is because a capital lease affects the company's financial position and results of operations for multiple periods.

Restating the financial statements for the current year only would not accurately reflect the impact of the lease on previous periods. Ignoring the error as immaterial or reporting it as a footnote in the next year's financial statements would also not correct the initial misclassification of the lease.

By restating the financial statements and adjusting prior years' financial statements, the company ensures that the lease is now classified correctly and the financial statements provide accurate and reliable information.