[zoeb]

Hi can someone please help explain the journal entries involved in this Becker F1 question? I understand how to get the 230k, but am having trouble understanding why it’s a debit adjustment and not a credit adjustment. Thanks in advance!

On January 2, Year 2, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in Year 1 but did not do so. Air’s reported income tax expense would have been $70,000 lower in Year 1 had it properly accrued this deferred compensation in its December 31, Year 2, financial statements, Air should adjust the beginning balance of its retained earnings by a:

a. $230,000 credit.

***b. $230,000 debit.

c. $300,000 credit.

d. $370,000 debit.

[Anonymous]

It would be a Dr to reduce retained earnings because expenses were understated in the previous period causing NI and RE to be overstated. When the error is corrected, NI for the period will be lower and RE will be lower as well. Please correct me if I am wrong.

[Anonymous]

My logic is that retained eanrings is a normal credit balance because it is all the revenue that exceeded expenses and dividends. Revenue is a CR Bal thus so is RE. That being the case, a debit to RE will reduce it which is needed in this case seeing is how they forgot to accrue for the bonus.

[Author]

Replies