Chap020 (accounting) 69 - timing of its discovery Level of...

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67. C Co. reported a retained earnings balance of $200,000 at December 31, 2010. In September 2011, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2010, had been paid and fully expensed in 2010. C has a 30% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2011 statement of retained earnings? A. $210,000. B. $214,000. C. $220,000. D. $221,000. The insurance premiums of $30,000 were charged in error to insurance expense on the 2010 income statements. The premiums should have been allocated equally at $10,000 per year for 2010, 2011, and 2012. Therefore, the beginning retained earnings at 2011 are understated by $14,000—the effect of the error ($20,000) less the $6,000 tax effect ($20,000 30%). The corrected retained earnings would be the beginning balance plus the correction of the error ($200,000 + 14,000 = $214,000). AACSB: Analytic Bloom's: Application Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors; regardless of the type of error or the
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Unformatted text preview: timing of its discovery. Level of Learning: Hard Berkshire Inc. uses a periodic inventory system. At the end of 2010, it missed counting some inventory items, resulting in an inventory understatement by $600,000. Assume that Berkshire has a 30% income tax rate and that this was the only error it made. 68. If undetected, what is the effect of this error on Berkshire's 12/31/2010 balance sheet? A. Assets understated by $600,000 and shareholders' equity understated by $600,000. B. Assets understated by $420,000 and shareholders' equity understated by $420,000. C. Assets understated by $600,000, liabilities understated by $180,000 and shareholders' equity understated by $420,000. D. None of the above is correct. AACSB: Analytic Bloom's: Application Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors; regardless of the type of error or the timing of its discovery. Level of Learning: Hard...
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