Question
In: Accounting
ABC Company purchased equipment that cost $2,000,000 on January 1, 2019. The entire cost was recorded...
ABC Company purchased equipment that cost $2,000,000 on January 1, 2019. The entire cost was recorded as an expense. The equipment had a ten-year life and a $100,000 residual value. ABC uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2022. ABC is subject to a 30% tax rate.
What is the adjustment to retained earnings at January 1, 2022?
Solutions
Expert Solution
Answer to Question:
Original Cost of Equipment Purchased on Jan 1, 2019 = $20,00,000
Useful Life = 10 years
Residual Value = $1,00,000
Depreciable Amount = Original Cost of Equipment- Residual Value
= $20,00,000 - $1,00,000
= $19,00,000
Depreciation Amount($) = Depreciable Amount/ Useful Life
= $19,00,000/ 10 years
= $1,90,000
Tax rate = 30%
The entire cost of Equipment was charged as expenses in the Year 2019 and the error was discovered on Dec 10,2022.
Total Depreciation that should be charged from 1.1.2019 to 31.12.2021
= $1,90,000 * 3
= $5,70,000
| Particulars | Amount($) |
| Reversal of Tax Benefit on Asset charged as expense | 600000 |
| [$20,00,000*30%)] | |
| Less: Tax Benefit from Depreciation that should have been charged | (171,000) |
| [$5,70,000*30%] | |
| Total Amount of profit to be enhanced in Retained Earning for Year 2022 | 429,000 |
Adjustment to Retained Earnings = $4,29,000.
Adjustment should be made on Jan 1 ,2022 by passing entry:
Income Summary Dr. $4,29,000
To, Retained Earnings A/c $4,29,000
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