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Ernst Company purchased equipment that cost $750,000 on January 1, 2010.The entire cost was recorded as an expense.The equipment had a nine-year life and a $30,000 residual value.Ernst uses the straight-line method to account for depreciation expense.The error was discovered on December 10, 2012.Ernst is subject to a 40% tax rate.
-Ernst's net income for the year ended December 31, 2010, was understated by

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The depreciation expense for each year should have been ($750,000 - $30,000) / 9 = $80,000. For 2010, the expense was recorded as $750,000 instead of $80,000, leading to an overstatement of expense by $670,000. After adjusting for tax (40%), the net income was understated by $670,000 * (1 - 0.40) = $402,000.

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