Question

Analyzing the effect of prior-period adjustments

Taylor Corporation discovered in 2019 that it had incorrectly recorded in 2018 a cash payment of \(70,000 for utilities expense. The correct amount of the utilities expense was \)35,000.

Requirements

2. How should this error be reported in the 2019 financial statements?

Short answer

The error will be added as a prior period adjustment of $35,000 to the beginning balance of the retained earnings in the Statement of Retained Earnings.

Step-by-step solution

Basic Introduction-

Retained earnings are the amount of profit remains with a corporation after payment of all direct costs, indirect costs, income taxes and dividends to stockholders of the corporation.

Reporting the error in 2019-

Statement of Retained Earnings
Beginning retained earnings	xxx
Add: Prior period adjustment ($70,000 - $35,000)	$35,000
Less: Dividend paid (if any)	(xxx)
Ending retained earnings	xxx