Question

Corp. discovered an error made in Year 1 while preparing Year 2 financial statements.

Fifteen months worth of insurance costs, totaling $15,000, were expensed in Year 1.

Company policy requires all insurance payments to be recorded initially as Prepaid Insurance.

A reconciliation of insurance showed the correct amount had been expensed in Year 2. Corp.'s tax rate in both years was 30%.

Year 1 ending retained earnings was reported at $86,000.

Year 2 net income was $45,000 & $10,000 of dividends were declared & paid in Year 2.1

1) Mkae a JE showing total insurance expensed in year 1

2) Make JE showing proper amount of insurance expensed in year 1

3) Make the appropriate journal entry to correct this error

4) Prepare the Statement of Retained Earnings for year 2 year end

Answer 1

Tran	Accounst Title	Dr	Cr
1	Insurance expenses	$15,000
	Prepaid Insurance		$15,000
2	Insurance expenses	$12,000
	Prepaid Insurance (15000/15*12)		$12,000
	(correct expenses)
3	Prepaid Insurance (3000*(1-.3))	2100
	Retained Earnings		2100
	Statement of Retained Earnings
	Unadjusted beginning Balance	$86,000
	Add: Prior period item (correction of error)	2100
	Adjusted Retained Eranings balance	$88,100
	Add: net Income	45000
	Less: dividends	-10000
	Ending Retained Eranings balance	$123,100