Worked-example setupScope and assumptions
- Granite Harbor is fictional; the public-company scope, error classification, four annual omissions, and no-reversal fact are supplied.
- Each year omitted $20,000 of operating expense and liability; tax is omitted only to isolate the two-view computation.
- The sign convention for income effects is the signed correction needed: negative reduces reported income. Ending balance effects use the signed adjustment to the account under the stated trial-balance convention.
- Materiality, auditor response, filing response, and control conclusions are not determined by the calculation.
- Period
- Years 1 through 4; discovery at the end of Year 4 before correction
- Units
- US dollars
- Rounding
- Retain full precision; display dollars with commas and parentheses for negatives
Problem
Granite Harbor omitted a $20,000 operating accrual in each of four years. The obligation did not reverse. At the end of Year 4, management proposes an $80,000 current expense so the liability will be correct. Quantify the error before evaluating that proposal.
Trace the layers
| Year | Signed correction to pretax income | Ending liability increase needed |
|---|---|---|
| 1 | $(20,000) | $20,000 |
| 2 | (20,000) | 40,000 |
| 3 | (20,000) | 60,000 |
| 4 before correction | (20,000) | 80,000 |
The Year 4 rollover amount is a $(20,000) correction to current pretax income. The iron-curtain amount is an $80,000 increase needed in the ending liability. Booking the full $(80,000) through Year 4 income creates a $(60,000) out-of- period component beyond the current origin.
Derive the current entry
Under the supplied no-tax facts and signed trial-balance convention:
Dr operating expense—Year 4 $20,000
Dr retained earnings—prior years 60,000
Cr operating liability $80,000
The entry balances and produces the corrected ending liability. It does not by itself revise the comparative statements. Years 1 through 3 still need their period-specific income, equity, EPS, note, audit, filing, and control response under the supplied conclusions.
Interpret the two views
Rollover is smaller here because the error accumulates. In a reversing error, iron curtain can be smaller. Neither approach is selected as conservative. For a covered registrant, both quantities enter the separate SAB 99 analysis, along with trends, contracts, compensation, segments, concealment, aggregate errors, and other actual facts.
The calculation proves the two quantities and the balanced entry. It does not decide materiality, whether current catch-up treatment is acceptable, whether previous filings are amended, what the auditor reports, or how a control deficiency is classified.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · accounting change error analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- current corrected balances
- 3 fields
Inspect data
{
"operating_expense": 20000,
"operating_liability": -80000,
"retained_earnings": -440000
}- current recorded balances
- 3 fields
Inspect data
{
"operating_expense": 0,
"operating_liability": 0,
"retained_earnings": -500000
}- misstatement layers
- 1 field
Inspect data
{
"omitted_operating_accrual": {
"current_period_income_effect": -20000,
"ending_balance_sheet_effect": 80000
}
}- period effects
- 4 fields
Inspect data
{
"year_1": {
"direct_pretax_adjustment": -20000,
"reported_amount": 300000,
"reported_corrected_amount": 280000,
"tax_rate": 0,
"weighted_average_common_shares": 400000
},
"year_2": {
"direct_pretax_adjustment": -20000,
"reported_amount": 330000,
"reported_corrected_amount": 310000,
"tax_rate": 0,
"weighted_average_common_shares": 410000
},
"year_3": {
"direct_pretax_adjustment": -20000,
"reported_amount": 360000,
"reported_corrected_amount": 340000,
"tax_rate": 0,
"weighted_average_common_shares": 420000
},
"year_4": {
"direct_pretax_adjustment": -20000,
"reported_amount": 390000,
"reported_corrected_amount": 370000,
"tax_rate": 0,
"weighted_average_common_shares": 430000
}
}- pre earliest period pretax effect
- 0
- pre earliest period tax rate
- 0
- proposed current income correction
- -80,000
- reported correction entry balance difference
- 0
- reported iron curtain amount
- 80,000
- reported opening equity effect
- 0
- reported out of period component
- -60,000
- reported rollover amount
- -20,000
- route
- error correction
Recomputed result
| Measure | Value |
|---|---|
| correction entry balance difference | 0 |
| correction operating expense | 20,000 |
| correction operating liability | -80,000 |
| correction retained earnings | 60,000 |
| iron curtain amount | 80,000 |
| opening equity effect | 0 |
| opening tax effect | 0 |
| out of period component | -60,000 |
| rollover amount | -20,000 |
| year 1 after tax effect | -20,000 |
| year 1 corrected amount | 280,000 |
| year 2 corrected amount | 310,000 |
| year 3 corrected amount | 340,000 |
| year 4 corrected amount | 370,000 |