Exercise 4-12 Pharoah Corporation began operations on January 1, 2014. During its first 3 years of...

Exercise 4-12 Pharoah Corporation began operations on January 1, 2014. During its first 3 years of operations, Pharoah reported net income and declared dividends as follows: Net income Dividends declared 2014 $43,400 $ –0– 2015 131,800 57,500 2016 164,000 52,400 The following information relates to 2017. Income before income tax $242,600 Prior period adjustment: understatement of 2015 depreciation expense (before taxes) $34,700 Cumulative decrease in income from change in inventory methods (before taxes) $36,100 Dividends declared (of this amount, $34,700 will be paid on January 15, 2018) $109,900 Effective tax rate 40 % Prepare a 2017 retained earnings statement for Pharoah Corporation. (List items that increase adjusted retained earnings first.) PHAROAH CORPORATION Retained Earnings Statement $ : : $ Assume Pharoah Corporation restricted retained earnings in the amount of $75,260 on December 31, 2017. After this action, what would Pharoah report as total retained earnings in its December 31, 2017, balance sheet? Total retained earnings $

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Expert Solution

Reatined Earnings Statement
Balance, January 1	229,300
Correction for depreciation error(net of Tax) (34700-34700*40% )	(20,820)
Cumulative decrease in income from change in inventory methods (36100-36100*40%)	(21,660)
Balance, January 1 Adjusted	186,820
Add: Net income- 2017 (242600*.6)	145,560
Subtotal	332,380
Less: Dividend Declared	(109,900)
Balance, Dec 31	222,480

Workings:

Year	Net Income	Dividend	Net Earnings
2014	43,400	-	43,400
2015	131,800	57,500	74,300
2016	164,000	52,400	111,600
Retained Earnings , Balance Jan 1			229,300

	2017
Income before income tax	242,600
understatement of 2015 depreciation expense	34,700
Cumulative decrease in income from change in inventory methods	36,100
Dividends declared	109,900
Tax Rate	40%

Part b:

The Total Retained Earnings will be same 222,480. It just labes part of the earnings as restricted and not available for distribution.

Reatined Earnings
Appropriated	75,260
Unappropriated	147,220
Total	222,480

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