Question

Eddie Zambrano Corporation began operations on January 1, 2017. During its first 3 years of operations, Zambrano reported net income and declared dividends as follows. Net Income Dividends Declared 2014 2015 2016 $ 40,000 $ 125,000 160,000 50,000 50,000 The following information relates to 2017. Income before income tax $ 240,000 Prior period adjustment: understatement of 2015 depreciation expense (before taxes) Cumulative decrease in income from change in inventory methods, 25,000 (before taxes) Dividends declared (of this amount, $25,000 will be paid on Jan. 15, 2018) Effective tax rate 35,000 100,000 40%

Answer 1

EDDIE ZAMBRANO CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017
Balance, January 1, as reported (40,000+125,000+160,000-50,000-50,000)	225,000
Correction for depreciation error (net of $25,000, - 40% tax rate (25000*.4)) (25000-10000)	(15,000)
Cumulative decrease in income from change in inventory methods (net of $35,000 - 40% tax or (350000*.4)) 35000-14000	(21,000)
Balance, January 1, as adjusted	189,000
Add: Net income [$240,000 - ($240,000 * 40%)]	144,000
	333,000
Deduct dividends declared	100,000
Balance, December 31	233,000
Total retained earnings would still be 233,000 as restriction does not affect total retained earnings
Retained earnings	70,000
Appropriated	163,000
Total	233,000