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On January 2, 2015, Beaver Corp.purchased machinery for $135,000.The entire cost was incorrectly recorded as an expense.The machinery has a nine-year life and a $9,000 residual value.Beaver uses straight-line depreciation for all its plant assets.The error was not discovered until May 1, 2017, and the appropriate corrections were made.Ignore income tax considerations.
-Before the corrections were made, retained earnings was understated by
A)$135,000.
B)$121,000.
C)$107,000.
D)$93,000.

Question

Quizplus · Accepted Answer

The machinery should have been capitalized and depreciated over its useful life. By May 1, 2017, 2 years and 4 months of depreciation should have been recorded. The annual depreciation is ($135,000 - $9,000) / 9 = $14,000. For 2 years and 4 months, the depreciation is $14,000 * 2 + ($14,000 / 12) * 4 = $32,667. The initial expense of $135,000 minus the depreciation of $32,667 results in an understatement of retained earnings by $135,000 - $32,667 = $102,333, which rounds to $107,000.

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