Question

Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2018. Prewitt has a tax rate of 35%. Prewitt's retained earnings as of December 31, 2018, would be (Round million answer to 2 decimal places.):

Answer 1

Answer:

Retained earnings will be less by $13 million than actual retained earnings.

Explanation:

Since there is an error in depreciation as on December 31, 2018

Where it is overstated by $20 million, and therefore net retained earnings of the year 2018 will be understated as because of overstatement of expenses.

Net effect of taxes will be that, $20 million X 35% tax = $7 taxes saved.

Reduced balance of retained earnings by = $20 - $7 = $13 million.