Question

Carla Vista Company purchased equipment that cost $3980000 on January 1, 2020. The entire cost was recorded as an expense. The equipment had a 9-year life and a $122000 residual value. Carla Vista uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2022. Carla Vista is subject to a 40% tax rate. Before the correction was made and before the books were closed on December 31, 2022, retained earnings was understated by

Answer 1

$1,800,402

Step-by-step explanation:

Cost = $3,980,000

Lifespan = 9 yrs

Residual Value = $122,000

Depreciation per year = (Cost - Residual Value)/life

Depreciation per year = (3,980,000 - 122,000)/9

Depreciation per year = 3,858,000 / 9

Depreciation per year = $428,667

So, Tax saved = 40% of $428,667 = $171,467

Depreciation per year not considered = 3 yrs * $428,667 = (+)$1,286,001

Tax saved due to Depreciation = 3 yrs * $171,467 = (+)$514,401

So, retained earnings was understated by $1,286,001 + $514,401 = $1,800,402