Book 1 - Chapter 30

7,	continued
	Items that increase retained earnings:
		Net income (from the income statement)
		Prior period adjustment (from an accounting error in a prior period that understated net income)
		Accumulated prior effect of a change in accounting principle (cumulative increase in net income)
		Reduction in appropriations of retained earnings (when retained earnings available for dividends is increased by a journal entry that reduces or eliminates the appropriation)
8.	A prior period adjustment is an entry to retained earnings (and to some other balance sheet account) to correct a revenue or expense error of a prior period. If the error caused the prior period net income to be overstated, retained earnings will be reduced by the adjustment in the current period. If the error caused the prior period net income to be understated, retained earnings will be increased by the adjustment in the current period. Prior period adjustments are shown as a decrease or increase in retained earnings on the statement of retained earnings (or statement of stockholders’ equity, which is discussed in Learning Goal 31). Prior period adjustments also require that the prior financial statements affected by the error be restated.
9.	A change in accounting principle is a change from a currently used and generally accepted accounting principle to a different generally accepted accounting principle. The accumulated effect of the change on the net income of all prior accounting periods that are affected is shown as an adjustment to the beginning balance of retained earnings on the statement of retained earnings. This same amount will also require a change in some asset or liability item in the current period. All affected previous financial statements must be restated using the new principle. ( Note: If comparative statements of retained earnings are presented, the beginning balance of the statement of the earliest period will show the adjustment.)
10.	Common Stock: The total dollar amount remains unchanged at $100,000. The par value decreases to $.50 per share.
	Paid-in Capital in Excess of Par, Common: The total dollar amount remains unchanged at $1,220,000.
	Treasury Stock: The total dollar amount remains unchanged at 20,000 × $8.60 = $172,000.
	The total authorized shares are unchanged at 500,000. The issued shares increase to 210,000, of which 20,000 are in treasury and 190,000 are outstanding. (The cost per share of the treasury stock becomes $172,000/20,000 = $8.60.)
11.

Baker Corporation Statement of Retained Earnings For Year Ended June 30, 2008
Balance, July 1, 2007 as reported	$720,000
Correction for 2007 understated income	5,000
Balance, July 1 as corrected	725,000
Net loss	(121,000)
Less: cash dividends	(40,000)
Balance, June 30, 2008

Learning Goal 30, continued

SOLUTIONS

Section VI · Corporations

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