Due to an error in computing depreciation expense, Crote Corporation understated accumulated depreciation by $60 million as of December 31, 2013. Crote has a tax rate of 40%. Crote's retained earnings as of December 31, 2013, 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 net income was overstated by $60 million. After accounting for taxes (40% of $60 million = $24 million), the overstatement of retained earnings is $36 million.

Due to an Error in Computing Depreciation Expense, Crote Corporation