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21-04-2020
Business

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Due to an error in computing depreciation expense, Hadley Corporation understated accumulated depreciation by $48,600 as of December 31, 2016. Hadley has a tax rate of 30%. Indicate whether Hadley's retained earnings as of December 31, 2016, would be overstated (O) or understated (U) and by what amount

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22-04-2020

Answer:

Overstatement of $34.020

Explanation:

A reduction in accumulated depreciation means the corresponding debit in income statement was also understated ,hence expenses were understated leading to overstated taxable income which would mean that retained earning was overstated

Deferred tax liability=$48,600*30%=$14,580

The correct retained earnings should have been lower by $14,580

Overstatement in retained earnings =$48,600-$14,580=$34,020

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