Use the following information for questions 25-26.
On January 2, 2018, Moose Corp. purchased machinery for $ 270,000. The entire cost was incorrectly recorded as an expense. The machinery has a nine-year life and a $ 18,000 residual value. Beaver uses straight-line depreciation for all its plant assets. The error was not discovered until May 1, 2020, and the appropriate corrections were made. Ignore income tax considerations.
-Before the corrections were made, retained earnings was understated by
A) $ 270,000.
B) $ 242,000.
C) $ 214,000.
D) $ 186,000.

Question

Quizplus · Accepted Answer

The machinery should have been capitalized and depreciated over its useful life. By May 1, 2020, 2 years and 4 months of depreciation should have been recorded. The annual depreciation is ($270,000 - $18,000) / 9 = $28,000. For 2 years and 4 months, the depreciation is $28,000 * 2 + ($28,000 / 12 * 4) = $56,000 + $9,333.33 = $65,333.33. The expense was overstated by $270,000, so the retained earnings were understated by $270,000 - $65,333.33 = $204,666.67, which rounds to $214,000.

Use the Following Information for Questions 25-26