C Co. reported a retained earnings balance of $200,000 at December 31, 2017. In September 2018, C determined that insurance premiums of $30,000 for the three-year period beginning January 1, 2017, had been paid and fully expensed in 2017. C has a 30% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2018 statement of retained earnings?
A) $210,000.
B) $214,000.
C) $220,000.
D) $221,000.

Question

Quizplus · Accepted Answer

The insurance premiums of $30,000 were charged in error to insurance expense on the 2017 income statements. The premiums should have been allocated equally at $10,000 per year for 2017, 2018, and 2019. Therefore, the beginning retained earnings at 2018 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).

C Co Reported a Retained Earnings Balance of $200,000 at December