Adjusting retained earnings for prior period errors

Steps:

• Start with draft retained earnings of $170,000.
• Subtract $25,000 for unrecorded irrecoverable debt, reducing net income and retained earnings.
• Add $15,000 for undervalued closing inventory, increasing net income via lower cost of goods sold.
• Subtract $30,000 for unrecorded dividend payment, directly reducing retained earnings.
• Calculate: $170,000 -$25,000 + $15,000 -$30,000 = $130,000.

Why C is correct:

• Retained earnings reflect accumulated profits minus dividends; adjustments correct errors to show true equity per accounting standards like IAS 8.

Why the others are wrong:

• A: Ignores inventory adjustment, understating by $15,000.
• B: Forgets dividend, overstating by $30,000.
• D: Misses debt and dividend adjustments, overstating by $55,000.

Final answer: C