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19 August, 18:28

Maker Co. discovered that in the prior year it incorrectly calculated depreciation expense and reported $75,000 in depreciation expense instead of the correct depreciation expense of $50,000. The tax rate for the current year was 35%. What was the impact of the error on Maker's financial statements for the prior period? Multiple Choice Understatement of depreciation expense of $25,000. Overstatement of net income of $16,250. Understatement of accumulated depreciation of $25,000. Overstatement of accumulated depreciation of $25,000.

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  1. 19 August, 21:29
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    The correct answer is D.

    Explanation:

    Giving the following information:

    Maker Co. discovered that in the prior year it incorrectly calculated depreciation expense and reported $75,000 in depreciation expense instead of the correct depreciation expense of $50,000. The tax rate for the current year was 35%.

    We need to calculate two different impacts:

    Accumulated depreciation = actual depreciation - original depreciation

    Accumulated depreciation = 50,000 - 75,000 = 25,000 overstated

    Now, the effect on income:

    Savings in tax = 25,000*0.35 = $8,750
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