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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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