Question

Moorman Corporation reports the following information:

Correction of understatement of depreciation expense
in prior years, net of tax $ 860,000
Dividends declared 640,000
Net income 2,000,000
Retained earnings, 1/1/14, as reported 4,000,000
Moorman should report retained earnings, 1/1/14, as adjusted at
a. $3,140,000
b. $4,000,000
c. $4,860,000
d. $6,220,000

Answer 1

To adjust Moorman Corporation's reported retained earnings at the beginning of 2014, the net of tax correction for the understatement of depreciation expense, $860,000, should be subtracted from the originally reported figure, resulting in adjusted retained earnings of $3,140,000. Option a is the correct answer.

Step-by-step explanation:

Moorman Corporation needs to adjust its reported retained earnings at the beginning of 2014 due to the correction of an understatement of depreciation expense in prior years. To calculate the adjusted retained earnings, we need to correct the previously reported amount by the net effect of the understatement. Since the depreciation expense was understated, the retained earnings were overstated by that amount.

The retained earnings at the beginning of 2014 were reported to be $4,000,000. To adjust this figure, we subtract the understatement of depreciation expense, net of tax, which is $860,000. Therefore, the adjusted retained earnings figure should be $4,000,000 - $860,000 = $3,140,000.