D is corrent. All corrections of errors (such as the $150,000 computational error) are treated as prior period adjustments. The $150,000 overstatement in the cost of goods sold, for the previous year, should be credited to the beginning balance of retained earnings.
A is incorrect. The $500,000 paid in settlement of litigation in year 2 is not a prior period adjustment. If we assume that the loss had been accrued as a contingency in year 1, there would be a debit to the liability account established in year 1. If, in year 1 the potential award had not met the criteria of a contingency per ASC Topic 450 (i.e., probable and reasonably estimable), then it would appropriately be considered an expense of year 2 when paid.
B is incorrect. The $500,000 paid in settlement of litigation in year 2 is not a prior period adjustment. If we assume that the loss had been accrued as a contingency in year 1, there would be a debit to the liability account established in year 1. If, in year 1 the potential award had not met the criteria of a contingency per ASC Topic 450 (i.e., probable and reasonably estimable), then it would appropriately be considered an expense of year 2 when paid.
A is incorrect. The $500,000 paid in settlement of litigation in year 2 is not a prior period adjustment. If we assume that the loss had been accrued as a contingency in year 1, there would be a debit to the liability account established in year 1. If, in year 1 the potential award had not met the criteria of a contingency per ASC Topic 450 (i.e., probable and reasonably estimable), then it would appropriately be considered an expense of year 2 when paid.
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