[Anonymous]

Conn Co. reported a retained earnings balance of $400,000 at December 31 of the previous year. In August of the current year, Conn determined that insurance premiums of $60,000 for the 3-year period beginning January 1 of the previous year had been paid and fully expensed in that year. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its current-year statement of retained earnings?

A. $420,000

B. $428,000

C. $440,000

D. $442,000

Answer B. Conn should report $428,000:

Beginning retained earnings as originally reported $400,000

Over expense of $40,000 – Tax of 30% ($12,000) 28,000

Corrected beginning retained earnings $428,000

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I have been looking at this and am wondering, where the heck did the answer solution get the over expense of $40,000 from?

[Missy]

If in the prior year they expensed 60k that was a 3 year policy, only 20k should have been an expense in the prior year ($60k/3), which means that the other 40k that was expensed should have actually been sitting on the balance sheet in prepaid insurance. They over expensed that 40k.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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