Use the information below to answer the following questions:
Leslie Ltd has found an error in its revenue account: an invoice for $3000 was recorded as revenue in 2011 when it should have been recorded in 2012. The company’s income tax rate is 40% and there was no corresponding error in cost of goods sold.
-Assuming that the dividend is unchanged,what is the effect of the error on retained profits at end of 2011?
A) It is $1200 too high.
B) It is $1800 too high.
C) It is $3000 too high.
D) There is no effect.

Question

Quizplus · Accepted Answer

Since the invoice was recorded as revenue in 2011 when it should have been recorded in 2012, the revenue for 2011 was overstated by $3000. This would have resulted in an overstatement of net income and, therefore, an overstatement of retained earnings. If the income tax rate is 40%, the error would have resulted in an overstatement of retained earnings by $1800 ($3000 x 0.4). Therefore, the effect of the error on retained profits at the end of 2011 is that it is $1800 too high.

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