Question

Blossom Corporation has retained earnings of $715,500 at January 1, 2020. Net income during 2020 was $1,435,900, and cash dividends declared and paid during 2020 totaled $79,600. Prepare a retained earnings statement for the year ended December 31, 2020. Assume an error was discovered: land costing $88,040 (net of tax) was charged to maintenance and repairs expense in 2019.

Answer 1

Answer:

Ending Balance of Retained earnings as at Dec 31, 2020 is $2,159,840.

Explanation:

                                             Blossom Corporation

         Statement of Retained Earnings for the year ended 31 Dec, 2020

Retained Earnings Balance as at Jan 1, 2020                  $715,500  

Add: Rectified Net Income of 2020*                                  $1,523,940  

*(Working & Explanation below)  

Less: Cash Dividends declared and paid during 2020  $(79,600)  

Retained Earnings Balance as at Dec 31, 2020           $2,159,840  

*Working and Explanation

Blossom corporation has committed an error of charging Land to Maintenance & Repairs Expense.  This error is classified as Error of Principle i.e. an item of financial statements is posted on the correct side of wrong type of account.  In case of Blossom Corporation, Land is debited to Maintenance & Repairs Expense account instead of Land Asset Account, resulting in overstatement of expenses and understatement of Net Income.

Therefore, reported Net Income of 2020 will have to be rectified before preparing statement of Retained Earnings. (see below)

Reported Net Income during 2020          $1,435,900  

Reversal of Overstatement of

Maintenance & Repairs Expense                  $88,040  

Rectified Net Income of 2020                   $1,523,940