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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