Due to an error in computing depreciation expense,Crote Corporation understated accumulated depreciation by $60 million as of December 31,2016.Crote has a tax rate of 40%.Crote's retained earnings as of December 31,2016,would be:
A)Overstated by $36 million.
B)Understated by $36 million.
C)Overstated by $24 million.
D)Understated by $24 million.

Question

Quizplus · Accepted Answer

The understatement of accumulated depreciation by $60 million means that the net income was overstated by $60 million before tax. After accounting for the 40% tax rate, the net income was overstated by $36 million ($60 million * (1 - 0.40)). This overstatement in net income leads to an overstatement in retained earnings by the same amount, $36 million.

Due to an Error in Computing Depreciation Expense,Crote Corporation Understated