Question

Fox Co. reported a retained earnings balance of $800,000 at December 31, 20x1. In August 20x2, Fox determined that insurance premiums of $120,000 for the three-year period beginning January 1, 20x1, had been paid and fully expensed in 20x1. Fox has a 30% income tax rate. What amount should Fox report as adjusted beginning retained earnings in its 20x2 statement of retained earnings? a $840,000 b $880,000 c $836,000 d $884,000

Answer 1

Answer: None of the above, the answer is $856,000

Explanation:

The retained earnings of 2001 is arrived at after deducting the tax rate of 30% .

Prior to deduction of tax, operating income is

100/70* 800,000

= 1,142,857.14

The insurance premium that is related to year 2001 is one year which is $40,000 therefore ($120,000-$40,000) which is $80,000 will be added back to the operating income of $1,142,857.14.

This gives $1,222,857.14 the tax rate of 30% is now deducted to give a balance of 70/100*1,222,857.14

this gives the retained earnings of

approximately $856,000 to be carried forward to 2002.