[Anonymous]

The following trial balance of Trey Co. at Dec 31, 1993, has been adjusted except for income tax expense:

Dr Cr

cash 550K

AR, net 1650K

Prepaid taxes 300k

AP 120K

Common Stock 500K

Add’l paid-in Capital 680K

Retained earnings 630K

Foreign Currency translation adjust

430K

Revenues 3600K

Expenses 2600K

Total:

$5530K DR $5530K CR

Additional information:

During 1993, estimated tax payments of $300k were charged to prepaid taxes. They has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey’s tax rate is 30%.

In Trey’s Dec 31, 1993, balance sheet, what amount should be reported as total retained earnings?

a. $1,200,000

b. $1,029,000

c. $1,330,000

d. $1,630,000

The correct answer is C. I understand Becker’s solution, but why isn’t

Cash (550k) + AR (1650K) + Prepaid Taxes (300K) – AP (120K) – C/S (500K) – APIC (680K) = $1,200K also the right answer? I mean, we all know that

Assets = Liabilities + Stockholder’s Equity.

Stockholder’s Equity could be further broken down into Retained Earnings, APIC, C/S, T/S, and P/S. Is it because that $1,200K does not take into account of the T/S and P/S. What exactly does the $1,200K tell us?

Thank you so much!

However,

[NYCaccountant]

Everything has been recorded already, so you should ignore everything in the equation except for revenue and expenses.

Based on the problem, we know that the only thing that has not been recorded is income tax expense. We know that there are no temporary differences between book and tax, so your income tax expense will simply be net income * the tax rate (3,600,000-2,600,000=1,000,000*30%=300,000). Income tax expense of 300,000k will reduce retained earnings to 1,330,000.

The fact that you prepaid for the taxes means nothing in this problem as well, the only thing that matters is the income tax expense, revenue, and expenses. Remember all of your balance sheet accounts do not directly feed into retained earnings. You got some feeding into common stock, preferred stock, APIC, so the equation you have would not work.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[Anonymous]

Thank you so much once again NYCaccountant!

[Author]

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