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ecstyle
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Joined: 10 Feb 2008
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Posts: 9

Posted: 03 May 2008 at 02:45 \| IP Logged

I have a multiple choice question from an accounting class and not sure about my answer...

Q: A corporation provides the following information:

1. Correction of understatement of depreciation expense in prior years, net of tax = $430, 000
2. Dividends declared = $320,000
3. Net Income =$1,000,000
4. Retained Earnings, 1/1//07, as reported = $2,000,000

The corporation should report earnings, 1/1/07 as adjusted at:

a) $1,570,000
b) $2,000,000
c) $2,430,000
d) $3,110,000

Is this a trick question? I was thinking about going with b) $2,000,000 but hesitant to choose this as my final answer.

any suggestions from any accounting pros out there?

lvn23
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Joined: 31 May 2008
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Posted: 31 May 2008 at 12:56 \| IP Logged

The answer is A. This specific topic deals with prior period adjustments (PPAs) and restating Retained Earnings. The formula is:

Beginning R/E as previously reported
+/- (Under)/Overstated Depreciation
-----------------------------------
R/E as Restated

+ Net Income
(Dividends)
-----------------------------------
Ending R/E

This Q was only asking up to the 3rd line - R/E as Restated - therefore, it's $2,000,000 - $430,000 = $1,570,000.

Edited by lvn23 on 31 May 2008 at 12:57

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