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Cedar Company purchased equipment that cost $100,000 on January 1, 2019. The entire cost was recorded...

Cedar Company purchased equipment that cost $100,000 on January 1, 2019. The entire cost was recorded as an expense. The equipment had a ten-year life. Cedar uses the straight-line method to account for depreciation expense. The error was discovered on December 10, 2022. Cedar is subject to a 20% tax rate.

What is the adjustment to retained earnings at January 1, 2022?

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Answer #1

Calculation of Depreciation to be charged in 2019

Depreciation = (Cost - Residual Value) / Estimated Life

= $100,000 / 10

= $10,000

Depreciation to be charged till 2010 (3 years) = $30,000 ($10,000 * 3)

Effect on Retained Earnings on January 1, 2022

= Increase retained earnings by cost of equipment net of tax - Depreciation effect from 2019 to 2022 net of tax

= [$100,000 (1 - 0.30)] - [$30,000 (1 - 0.30)]

= $49,000.

Therefore, Retained Earnings in 2022 will be increased by $49,000.

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