14. The following information relates to the Smith Company for 2002: Cash divide
ID: 2561548 • Letter: 1
Question
14. The following information relates to the Smith Company for 2002:
Cash dividend declared
$ 300
Retained earnings, January 1, 2006
?
Net income
580
Error in 2005 - overstatement of ending inventory; error
found in 2006
150
Retained earnings, December 31, 2006
1,400
What was the unadjusted January 1, 2006, balance in retained earnings?
a.
$1,420
b.
$1,120
c.
$1,270
d.
$1,170
Cash dividend declared
$ 300
Retained earnings, January 1, 2006
?
Net income
580
Error in 2005 - overstatement of ending inventory; error
found in 2006
150
Retained earnings, December 31, 2006
1,400
Explanation / Answer
Cah dividends declared reduces the Retained earnings
Journal entry :
Retained earnings
Dividends payable
Net profit increaes the Retained earnings
Overstatement of the ending inventory has increased the Retained earnings in 2005 and the Retained earnings has to be reduced in 2006 by 150
Retained earnings December 31, 2006 = Retained earnings January 1, 2006 + net income - dividends declared - inventory error
1,400 = Retained earnings January 1, 2006 + 580 - 300 - 150
Retained earnings January 1, 2006 = 1270
The answer is C.
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