Question

C Co. reported a retained earnings balance of $230,000 at December 31, 2020. In September 2021, C determined that insurance premiums of $81,000 for the three-year period beginning January 1, 2020, had been paid and fully expensed in 2020. C has a 25% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2021 statement of retained earnings

Answer 1

$267,800

Step-by-step explanation:

Calculation to determine What amount should C report as adjusted beginning retained earnings in its 2021 statement of retained earnings

First step is to Allocate the premium equally starting from 2020,2021 to 2022

Premium=$81,000/3 years

Premium=$27,000

Second step is to calculate the effect of the error

Effect of error=$81,000-$27,000

Effect of error=$54,000

Third step is to calculate the tax effect

Tax effect =$54,000*30%

Tax effect=$16,200

Fourth step is to calculate the 2021 beginning retained earnings

2021 Beginning retained earnings=$54,000-$16,200

2021 Beginning retained earnings=$37,800 Understated

Now let determine the Corrected retained earnings

Using this formula

Corrected retained earnings =Beginning balance + Understated Beginning retained earnings

Let plug in the formula

Corrected retained earnings= $230,000 + $37,800

Corrected retained earnings= $267,800

Therefore the amount that C should report as adjusted beginning retained earnings in its 2021 statement of retained earnings will be $267,800