ACC 100 WEEK 10
Corporate Balance Sheet, Income Statement, and Analysis
Corporate Income Statement and Statement of Retained Earnings
The statement of retained earnings starts with beginning retained earnings and lists all the changes in Retained Earnings for the period.
Let’s examine each item in this problem individually:
Correction of error:
Revenue and expense items are closed into Retained Earnings during the closing process. Thus, any errors related to revenue and expense items from a prior period(s) will have to be adjusted through Retained Earnings.
The effect of these errors is shown net of tax and adjusts beginning retained earnings on the retained earnings statement.
To compute the amount of the correction (of the error), net of tax, first calculate the tax effect of the error. An increase in income will also increase tax. Thus, there is additional tax associated with this error.
|Additional tax||= Error × Tax rate|
|= $38,100 × 38%|
Note: There is another way to compute the gain net of tax.
|Gain net of tax||= Gain × (1 – Income tax rate)|
|= $38,100 × (1 – 38%)|
|= $38,100 × 0.62|
Net income increases Retained Earnings and will be listed in the retained earnings statement after adjusted beginning retained earnings.
Cash dividends declared
When dividends are declared, Retained Earnings is reduced. Cash dividends declared will reduce Retained Earnings and will follow net income on the retained earnings statement.
Cash Dividends Paid:
When cash dividends are paid, Dividends Payable is reduced and Cash is reduced. However, this transaction does not affect Retained Earnings. Retained Earnings is decreased when dividends are declared, not paid.
Accumulated depreciation is a contra-asset that is reported on the balance sheet in the property, plant, and equipment section. It does not affect Retained Earnings, and it will not be found on the retained earnings statement.
Thus, the answer is:
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