At January 1, 2020, Bonita Company reported retained earnings of $2,026,000. In 2020, Bonita discovered that 2019 depreciation expense was understated by $405,200. In 2020, net income was $985,000 and dividends declared were $225,000. The tax rate is 20%. Prepare a 2020 retained earnings statement for Bonita Company.

Bonita Company 2020 Retained Earnings Statement

Adjusted Beginning Retained Earnings - $1,620,800

Add Net Income less Tax ($985,000 - $197,000) - $788,000

Less Dividend Declared  - $225,000

Balance  - $2,183,800

Explanation:

a) The opening retained earnings given is adjusted for understated depreciation.  To gives an adjusted retained earnings balance of $1,620,800 ($2,026,000 - $405,200).

b)Tax is equal to 20% of $985,000 net income, i.e. = $197,000.  This gives a net income after tax of $788,000 ($985,000 - $197,000).  Tax is charged before dividends are declared.

c) The amount of the dividends declared is deducted from the net income after tax to arrive at retained earnings for the year.

d) The opening balance on retained earnings, plus retained earnings for the year less dividends, gives the closing balance on retained earnings.

e) Retained Earnings are the profits which a company does not distribute to its investors.  They are used to grow the company and they subsequently increase the returns to investors in the form of future dividends or share price appreciation.