Question

Due to an error in computing depreciation expense, Crote Corporation understated accumulated depreciation by $64 million as of December 31, 2018. Crote has a tax rate of 40%. Crote's retained earnings as of December 31, 2018, would be (Round million answer to 2 decimal places.):

Multiple Choice

Overstated by $64.00 million.

Overstated by $38.40 million.

Understated by $64.00 million.

Understated by $38.40 million.

Answer 1

Answer

Retained earnings will be overstated by $38.40 million

Explanation:

The overstatement of retained earnings by this amount arises from the fact that if the depreciation of $64 million had been charged, the charge will have been tax deductible at 40% thus the amount overstated if (1-40%) x $64m =$38.4m.

Answer 2

Crote's retained earnings as of December 31, 2018, would be overstated by $\ 38.40 \text{ million}$

Explanation:

Overstated = The amount is more than it ought to be = Very high

Accumulated depreciation =  $\ 64 \text{ million}$

Tax rate = $40\%$

In round 2 decimal places = 0.40

Right now, revenue is underestimated because cash was removed due to error of the depreciation costs

Round million on December 31, 2018 as 2 decimal places = $\rightarrow \frac{64}{2} = 38$

In decimals = $\ 38.40 \text{ million}$

If your initial inventory has been overstated, you overestimate the cost of sold items, and underestimate net profit and net earnings. When the inventory ends in excess, the costs of the goods are understated and the gross profit and net profit is excessively increased.