Question

In 2011, the Perasso Meat Packing Company revised the useful life of its equipment from eight years to six years. Depreciation recorded in prior years on existing equipment was $126,000 applying the eight-year useful life. Depreciation in prior years would have been $186,000 if the six-year useful life had been used. Assuming an income tax rate of 40%, Perasso's increase in 2011's beginning retained earnings would be:

Answer 1

Perasso Meat Packing Company's increase in 2011's beginning retained earnings, after adjusting the equipment's useful life from eight to six years and considering an income tax rate of 40%, would be $36,000.

Step-by-step explanation:

The student asked how to calculate Perasso Meat Packing Company's increase in 2011's beginning retained earnings due to a revision in the useful life of its equipment from eight years to six years.

The difference in depreciation between the two useful life estimates is $186,000 (using six years) minus $126,000 (using eight years), which equals $60,000.

After considering the income tax rate of 40%, the increase in retained earnings is reduced by 40% of $60,000 ($24,000), yielding a net increase of $36,000 in retained earnings.