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Link Co.purchased machinery that cost $810,000 on January 4, 2009.The entire cost was recorded as an expense.The machinery has a nine-year life and a $54,000 residual value.The error was discovered on December 20, 2011.Ignore income tax considerations.
-Before the correction was made, and before the books were closed on December 31, 2011, retained earnings was understated by

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The machinery should have been capitalized and depreciated over its useful life. The annual depreciation is ($810,000 - $54,000) / 9 = $84,000. For three years (2009, 2010, 2011), the total depreciation should be 3 * $84,000 = $252,000. The expense recorded was $810,000, so the retained earnings were understated by $810,000 - $252,000 = $558,000.

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