Audit of retained earnings

The Retained Earnings account of Endurance Company shows the following debits and credits
for the year 2015:

RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
Jan. Balance 726,400
1
(a) Loss from fire 5,250 721,150
(b) Write-off of
52,500 668,650
goodwill
(c) Share
dividends 140,000 528,650
distributed
(d) Loss on sale of
48,300 480,350
equipment

RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
(e) Officers’
compensation
related to
income of 325,500 154,850
prior periods
- accrual
overlooked
(f) Loss on
retirement of
preference
70,000 84,850
shares at
more than
issue price
(g) Paid in
capital in 129,500 214,350
excess of par
(h) Share 10,000 204,350
issuance
expenses
( related to

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 letter g)
(i) Share
subscription 8,470 212,820
defaults
(j) Gain on
retirement of
preference
25,900 238,720
shares at less
than issue
price
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
(k) Gain on
early
15,050 253,770
retirement
of bonds
(l) Gain on life
insurance
10,500 264,720
policy
settlement
(m) Correction
of a
50,050 314,320
fundamental
error
(n) Effect of
change in
accounting
principle 100,000 414,320
from FIFO
to weighted
average
(o) Dividends
25,000 389,320
Payable
(p) Loss on sale
of treasury 20,000 369,320
shares
(q) Proceeds
from sale of
40,000 409,320
donated
shares

RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit

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 (r) Appraisal
increase in 250,000 659,320
land
(s) Gain on life
insurance
100,000 559,320
policy
settlement

Required:
1. Prepare adjusting journal entries to correct the Retained Earnings account.
2. Determine the correct amount of Retained Earnings account before closing the profit or
loss for the period.

SOLUTION:

a Profit or loss (Other expense) 5,250

Retained earnings 5,250

b Profit or loss (Other expense) 52,500

Retained earnings 52,500

d Profit or loss (Other expense) 48,300

Retained earnings 48,300

g Retained earnings 129,500

Share premium 129,500

h Share premium 10,000

Retained earnings 10,000

i Retained earnings 8,470

Share premium 8,470

j Retained earnings 25,900

Share premium 25,900

k Retained earnings 15,050

Profit or loss (Other income) 15,050

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 l Retained earnings 10,500
Profit or loss (Other income) 10,500

q Retained earnings 40,000

Share premium 40,000

r Retained earnings 250,000

Revaluation surplus 250,000

Unadjusted retained earnings balance 559,320

a 5,250
b 52,500
d 48,300
g (129,500)
h 10,000
i (8,470)
j (25,900)
k (15,050)
l (10,500)
q (40,000)
r (250,000)

Correct amount of RE before closing profit or loss 195,950

Alternative computation:
Jan.
1 Balance 726,400
c Share dividend (140,000)
e Officers’ compensation related to income
of prior periods – accrual overlooked (325,500)
f Loss on retirement of preferred shares

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 at more than issue price (70,000)
m Correction of prior-period error 50,050
n Effect of change in accounting principle
from FIFO to weighted average 100,000
o Dividends payable (25,000)
p Loss on sale of treasury stock (20,000)
s Appropriated for property acquisition (100,000)

Correct amount of RE before closing profit or loss 195,950

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