Question

Martinez Corp. began operations in 2014. During the years 2014-2016, it reported net income and declared dividends as follows.

		Net income			Dividends declared
2014		$27,000			$ –0–
2015		118,000			–0–
2016		234,000			48,000

During 2017, Martinez Corp.:

●		discovered that it had failed, in 2015, to record $44,000 in depreciation on equipment in one of its warehouses.
●		changed, on January 1 ,2017, from the average cost to the FIFO method of accounting for its inventory. If Martinez Corp. had applied the FIFO method to it inventory in prior years, cumulative net income (before tax) would have been $17,000 lower than originally reported.
●		reported income before income tax expense of $520,000.
●		declared and paid dividends to common shareholders of $83,000.

Martinez’s effective income tax rate for all years was 40%.

Prepare a 2017 retained earnings statement for Martinez Corp. (List items that increase retained earnings first.) MARTINEZ CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 Retained Earnings, January 1, as Reported $ Correction for Depreciation Error Cumulative Decrease in Income from Change in Inventory Methods Retained Earnings, January 1, as Adjusted Add Net Income / (Loss) Less Dividends Declared Retained Earnings, December 31

Answer 1

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MARTINEZ CORPORATION
Retained Earnings Statement
For the year Ended December 31, 2017
Retained Earnings, January 1, as Reported	$      331,000
(27,000+118,000+234,000-48,000)
Correction for Depreciation Error	$       (26,400)
$44,000 - (44,000 * 40%)
Cumulative Decrease in Income from Change in Inventory Methods	$       (10,200)
$17,000 - (17,000 * 40%)
Retained Earnings, January 1, as Adjusted	$      294,400
Add: Net Income / (Loss)
($520,000 - (520,000 * 40%))	$      312,000
Less: Dividends Declared	$       (83,000)
Retained Earnings, December 31	$      229,000

With restriction applied

Total earnings would still be reported as $229,000. A restriction usually does not afect total retained earnings. It merely labels part of the retained earnings as being unavailable for evenly distribution.

Retained earnings :

Appropriated: $72,000

Unappropriated: $157,000

Total: $229,000