During an audit of Madison Company$$s December $31,2020$ records it was discovered that the company did not accurately accrue for $$12,500$ of depreciation expense. The accrual of interest expense of $$4,500$ was also omitted. These errors occurred in $2019$ and have a material impact on Madison$$s financial records. Madison$$s net income for the year was $$123,000.$ The company is subject to a $35\%$ tax rate. The company had a retained earnings balance of $$557,500$ on January $1,2020.$ No dividends were paid.

Required:

$1.$ Prepare the necessary journal entries to correct the accounting records of Madison Company$$s books.

$2.$ Prepare the statement of retained earnings for $2020.$

CHART OF ACCOUNTS

Madison Company

General Ledger

ASSETS

$111$ Cash

$121$ Accounts Receivable

$141$ Inventory

$152$ Prepaid Insurance

$181$ Equipment

$189$ Accumulated Depreciation

$190$ Income Tax Refund Receivable

LIABILITIES

$211$ Accounts Payable

$231$ Salaries Payable

$250$ Unearned Revenue

$256$ Interest Payable

EQUITY

$311$ Common Stock

$331$ Retained Earnings

REVENUE

$411$ Sales Revenue

EXPENSES

$500$ Cost of Goods Sold

$511$ Insurance Expense

$512$ Utilities Expense

$521$ Salaries Expense

$532$ Bad Debt Expense

$540$ Interest Expense

$541$ Depreciation Expense

$559$ Miscellaneous Expense

$910$ Income Tax Expense

Amount Descriptions

Adjusted retained earnings, January $1,2020$

Correction of overstatement of $2019$ depreciation

Correction of overstatement of $2019$ interest

Correction of understatement of $2019$ depreciation

Correction of understatement of $2019$ interest

Net income

Net loss

Retained earnings, as previously reported, January $1,2020$

Retained earnings, December $31,2020$