Question

Coronado Corporation began operations on January 1, 2017. During its first 3 years of operations, Coronado reported net income and declared dividends as follows:

		Net income			Dividends declared
2017		$45,600			$ –0–
2018		134,600			55,900
2019		165,000			51,200

The following information relates to 2020.

Income before income tax		$221,600
Prior period adjustment: understatement of 2018 depreciation expense (before taxes)		$33,700
Cumulative decrease in income from change in inventory methods (before taxes)		$36,200
Dividends declared (of this amount, $33,700 will be paid on Jan. 15, 2021)		$107,100
Effective tax rate		20	%

Assume Coronado Corporation restricted retained earnings in the amount of $64,990 on December 31, 2020. After this action, what would Coronado report as total retained earnings in its December 31, 2020, balance sheet?

Total retained earnings =

Answer 1

Answer :-

Coronado Corporation Retained earnings statement For the year ended December 31,2020
Retained Earnings as at January 1 - ( Add net income of 2017 ,2018 and 2019 and less dividend declared of those year = $45,600 + $ 134,600 + $ 165,000 - $55,900 - $51,200)	$238,100
Correction for depreciation error ( Note 1)	($26,960)
Cumulative decrease in income from change in inventory methods (36,200 - 20% of $36,200)	($28,960)
Retained earnings balance at January 1, after Adjustment	$182,180
Add :- Net income after tax ( $221,600 - 20 % of $221,600	$177,280
	$359,460
Less :- Dividend Declared	($107,100)
Retained earnings balance at December 31, 2020	$252,360

If there is restricted retained earnings in the amount of $64,990 on December 31, 2020 then also total retained earnings in its December 31, 2020, balance sheet reported as $252,360 . This restriction does not affect the total retained earnings. Due to restriction the retained earnings would classified as -

Retained Earnings -

Appropriate - $64,990

Unappropriate - $187,370

Total Retained Earnings - $252,360

Note 1 :-

In the question it was given that there was understatement of 2018 depreciation expense (before taxes) of $33,700

So , depreciation error = $ 33,700 - 20% effective tax rate of $33,700

Depreciation error = $26,960

If amount is given in before taxes then we should deduct the tax from that amount.