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24 May, 00:02

Fox Co. reported a retained earnings balance of $800,000 at December 31, 20x1. In August 20x2, Fox determined that insurance premiums of $120,000 for the three-year period beginning January 1, 20x1, had been paid and fully expensed in 20x1. Fox has a 30% income tax rate. What amount should Fox report as adjusted beginning retained earnings in its 20x2 statement of retained earnings? a $840,000 b $880,000 c $836,000 d $884,000

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  1. 24 May, 01:20
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    Answer: None of the above, the answer is $856,000

    Explanation:

    The retained earnings of 2001 is arrived at after deducting the tax rate of 30%.

    Prior to deduction of tax, operating income is

    100/70 * 800,000

    = 1,142,857.14

    The insurance premium that is related to year 2001 is one year which is $40,000 therefore ($120,000-$40,000) which is $80,000 will be added back to the operating income of $1,142,857.14.

    This gives $1,222,857.14 the tax rate of 30% is now deducted to give a balance of 70/100*1,222,857.14

    this gives the retained earnings of

    approximately $856,000 to be carried forward to 2002.
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