Question

On January 2, year 2, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in year 1 but did not do so. Air's reported income tax expense would have been $70,000 lower in year 1 had it properly accrued this deferred compensation. In its December 31, year 2 financial statements, Air should adjust the beginning balance of its retained earnings by a

a. $230,000 credit.
b. $230,000 debit.
c. $300,000 credit.
d. $370,000 debit.

Answer 1

b. $230,000 debit.

Step-by-step explanation:

Since the payment under a deferred-compensation arrangement is $300,000 is not recorded in year 1 which specifies the error and the $70,000 was lower in year 1. So, to correct this, the computation is shown below:

= Paying amount - income tax expense

= $300,000 - $70,000

= $230,000

It is a retrospective adjustment which is shown above