Use the following information for questions For Pear Limited, events and transactions during 2015 included the following.The tax rate for all items is 30%. 1)Depreciation for 2014 was found to be understated by $30,000. 2)A strike by the employees of a supplier resulted in a loss of $20,000. 3)The inventory at December 31, 2013 was overstated by $40,000. 4)A flood destroyed a building that had a book value of $400,000.Floods are very uncommon in that area.
-The effect of these events and transactions on the balance of retained earnings at January 1, 2015 would be
A)$14,000.
B)$21,000.
C)$294,000.
D)$343,000.

Question

Quizplus · Accepted Answer

The correction of the 2014 depreciation error ($30,000 understated) and the 2013 inventory error ($40,000 overstated) affect retained earnings. The net effect is a decrease of $70,000 before tax, which is $49,000 after tax (70,000 * 0.7). The flood loss is extraordinary and affects the income statement, not retained earnings directly. The supplier strike loss is an operational expense. Therefore, the retained earnings decrease by $49,000, resulting in a balance change of $294,000 (343,000 - 49,000).

Use the Following Information for Questions for Pear Limited, Events