Correct Prior Period Errors Practice Test

A for-profit construction contractor discovered in 2026 that in 2025 it recorded $350,000 of customer deposits as revenue upon receipt rather than as a contract liability. The error caused 2025 revenues and retained earnings to be overstated and liabilities to be understated; the deposits remained unearned at December 31, 2025. The 2025 financial statements were issued and are presented comparatively with 2026. Under FASB ASC 250, how should the prior period error be corrected in accordance with GAAP?

A for-profit manufacturer discovered in 2026 that depreciation on equipment was calculated using a 10-year life instead of the correct 5-year life beginning in 2025. The equipment cost $1,000,000, has no salvage value, and was placed in service on January 1, 2025; straight-line depreciation is used. The 2025 financial statements were issued and are presented comparatively with 2026. Under FASB ASC 250, what journal entry should be made to rectify the prior period error (ignoring income taxes)?