Final answer:
An error in the amount of preferred dividends declared will either understate or overstate retained earnings, depending on the nature of the error. The correct answer is option c.
Step-by-step explanation:
The question asks about the impact of an error in the amount of preferred dividends declared on retained earnings. Retained earnings are the portion of a company's profit that is held or retained and saved for future use or to pay debt and are not paid out as dividends. When a dividend is declared, it reduces the retained earnings of the company as it represents a commitment to pay shareholders.
Now, if there is an error and too much is declared in dividends, it will result in the retained earnings being understated because more money is being recorded as an obligation to be paid out than what should be. Conversely, if too little is declared, then the retained earnings will be overstated since not enough of the company's profits have been earmarked for distribution to shareholders.
Given this understanding, under the circumstances of an error in the amount of preferred dividends declared in 2022, the impact on retained earnings would be that they are either overstated or understated depending on whether the error was an overdeclaration or an underdeclaration of dividends. Without specific details regarding whether the error was an over or underdeclaration, we only know that the retained earnings will be incorrectly stated, but not the precise direction. In answering the question, since the impact is contingent on the nature of the error, which we don't know from the information given, the correct answer is that the retained earnings will be 'Understated' due to the error in declaration of preferred dividends.