ExpertMedium1 markMultiple Choice
CPA · Question 36 · Area III: Select Transactions
In Year 2, a company discovered it failed to accrue $50,000 of warranty expense in Year 1. The tax rate is 30%. What is the adjustment to beginning Retained Earnings in the Year 2 Statement of Changes in Equity?
In Year 2, a company discovered it failed to accrue $50,000 of warranty expense in Year 1. The tax rate is 30%. What is the adjustment to beginning Retained Earnings in the Year 2 Statement of Changes in Equity?
Answer options:
A.
Debit $50,000
B.
Credit $35,000
C.
Debit $35,000
D.
Debit $15,000
How to approach this question
1. Identify Error: Expense understated. 2. Effect on NI: NI Overstated. 3. Effect on RE: RE Overstated. 4. Correction: Debit RE (reduce it). 5. Amount: Net of Tax ($50k * 70%).
Full Answer
C.Debit $35,000✓ Correct
C
The error overstated Year 1 Net Income. To correct, we must reduce (Debit) Beginning Retained Earnings. The amount is the error net of tax: $50,000 * (1 - 0.30) = $35,000.
Common mistakes
Forgetting tax effect; wrong direction (Credit instead of Debit).
Practice the full CPA FAR Practice Exam 4
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Corp. is preparing its Statement of Cash Flows for the year ended December 31, Year 1, usin...HardQ02Parent Co. acquired 80% of Sub Co. on January 1, Year 1. During Year 1, Parent sold inventory to ...HardQ03A nongovernmental not-for-profit organization received a $500,000 pledge in Year 1 to be used for...MediumQ04A nongovernmental not-for-profit entity reports the following cash flows for the current year:<br...MediumQ05A city government levies a special property tax dedicated solely to the repayment of general obli...Medium