Question

Chiasso Co. reported a retained earnings balance of $200,000 at December 31, 2020. In September 2021, Chiasso determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2020, had been paid and fully expensed in 2020. Chiasso has a 25% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2021 statement of retained earnings?

Answer 1

Answer:

$215,000

Explanation:

Retained Earning is an equity account and its balance is credit in nature. It is the accumulated balance of all the prior year's income / losses after paying all the dividend. This balance can be used for the dividend payment or reinvestment in the business.

Any prior years adjustment in the revenue and expense will be recorded in the retained earning because it carry the accumulated profit all the prior years.

The premium on insurance for only one year should be recorded, but premium of 3 years is expense in 2020, from which there is an advance premium of 2 years.

Adjustment Value = $30,000 x 2/3 x (1-0.25) = $15,000

The adjustment should be added in the retained earning balance as it was expensed earlier.

Adjusted retained earning balance = $200,000 + $15,000 = $215,000