Question

Windsor Corporation began operations on January 1, 2017. During its first 3 years of operations, Windsor reported net income and declared dividends as follows: 2017 2018 2019 Net income $49,500 128,600 161,000 Dividends declared $-0- 59,600 58,800 The following information relates to 2020. Income before income tax Prior period adjustment: understatement of 2018 depreciation expense (before taxes) Cumulative decrease in income from change in inventory methods (before taxes) Dividends declared (of this amount, $32,000 will be paid on Jan. 15, 2021) Effective tax rate $231,000 $32,000 $44,800 $118,400 20% Prepare a 2020 retained earnings statement for Windsor Corporation. (List items that increase adjusted retained earnings first.) WINDSOR CORPORATION Retained Earnings Statement

Answer 1

Solution:

Windsor Corporation

Retained Earnings Statement

For the year ended December 31,2020

Retained earnings on January 1 as reported ( 49,500 + 128,600 + 161,000 - 59,600-58,800)	$ 220,700
Correction of depreciation error net of tax ( 32,000 x 0.8)	(25,600)
Cumulative decrease in income from change in inventory methods net of tax ( 44,800 x 0.8)	(35,840)
Adjusted balance of retained earnings on January 1	$ 159,260
Add: Net Income [231,000 - (231,000 x 20%)]	$ 184,800
	$344,060
Deduct: Dividends declared	$ 118,400
Balance , December 31	$ 225,660

b) A restriction on retained earnings does not usually affect total retained earnings.The total retained earnings will still be reported as $ 225,660. This restriction only indicates that a part of retained earnings is unavailable for distribution to shareholders as dividends.It should be reported separately as a line item. Here, the retained earnings is restricted to $ 74,150 which means that out of the balance of $ 225,660 on December 31 only $ 74,150 is available for distribution as dividends, the balance amount is not available for distribution.

Retained earnings
Appropriated	$ 74,150
Unappropriated	$ 151,510
Total	$ 225,660