ExpertMedium1 markMultiple Choice
CPA · Question 14 · Area I: Financial Reporting
At the beginning of Year 1, Delta Corp. had Retained Earnings of $500,000. During Year 1, Delta reported Net Income of $150,000, declared cash dividends of $40,000, and discovered a material error in Year 0 depreciation that understated Year 0 expense by $20,000 (net of tax). What is the Retained Earnings balance at December 31, Year 1?
At the beginning of Year 1, Delta Corp. had Retained Earnings of $500,000. During Year 1, Delta reported Net Income of $150,000, declared cash dividends of $40,000, and discovered a material error in Year 0 depreciation that understated Year 0 expense by $20,000 (net of tax). What is the Retained Earnings balance at December 31, Year 1?
Answer options:
A.
$610,000
B.
$630,000
C.
$590,000
D.
$650,000
How to approach this question
Roll forward Retained Earnings: Beginning Balance +/- Prior Period Adjustments (Error corrections) + Net Income - Dividends Declared = Ending Balance.
Full Answer
C.$590,000✓ Correct
C
Beginning RE: $500,000<br/>Prior Period Adjustment: ($20,000) (Expense understated -> Income overstated -> Reduce RE)<br/>Adjusted Beg RE: $480,000<br/>+ Net Income: $150,000<br/>- Dividends: ($40,000)<br/>Ending RE: $590,000.
Common mistakes
Getting the direction of the error correction wrong; ignoring dividends.
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