Answer:
To correct the error made by Fris Corp. in recording the equipment purchase as repair expense in year 1, we need to make an adjustment to the financial statements in year 3. Specifically, we need to recognize the equipment as an asset and allocate its cost over its useful life.
Given that the equipment has a 5-year life with no residual value, it means that the cost of the equipment should be allocated evenly over 5 years. The adjustment in year 3 will involve recognizing the remaining unrecorded cost as an expense and reducing the retained earnings accordingly.
To calculate the adjustment in year 3, we need to determine the total cost of the equipment and the accumulated depreciation up to year 3.
Total cost of the equipment = $100,000
Depreciation expense per year = Total cost of the equipment / Useful life
= $100,000 / 5 years
= $20,000 per year
Accumulated depreciation from year 1 to year 3 = Depreciation expense per year * Number of years
= $20,000 * 3 years
= $60,000
Since the error was discovered in year 3, the adjustment in year 3 will involve recognizing an additional $40,000 as an expense ($100,000 - $60,000) and reducing the retained earnings accordingly.
Therefore, the adjustment that should be made to retained earnings in year 3 is a decrease of $40,000.