At the end of Year 1, Schule Company incorrectly recorded notes payable as accounts payable. The error was discovered during Year 3. The company’s Year 3 annual report includes comparative financial statements covering Years 2 and 3. 

The company should: 

a) Record a journal entry to correct the notes payable and accounts payable balances.

b) Retrospectively restate the Year 2 balance sheet to reflect the correction.

c) Report the correction as a prior period adjustment to the beginning balance of retained earnings reported for Year 2.

d) Include the nature of the error in a disclosure note.