D is corrent. The requirement is to determine the amount of the prior period adjustment. ASC Topic 250 provides that an error in the financial statements requires restatement of the financial statements with an adjusting entry to retained earnings for the earliest period presented. When Raft incorrectly expensed the machine in year 1, earnings before tax was understated by $210,000. Had Raft properly capitalized this asset, it would have recorded $20,000 depreciation expense per year in year 1, year 2, and year 3. Depreciation expense is calculated on a straight-line basis as $20,000 [($210,000 - $10,000)/10 years] per year. Over the three years, Raft would have recorded a total of $60,000 of depreciation expense. Therefore, as of January 2, year 4, expenses have been overstated by $150,000 ($210,000 - $60,000), and the tax effect of the adjustment is 30% x $150,000, or $45,000. Therefore, the prior period adjustment to retained earnings net of taxes is $105,000 ($150,000 - $45,000).
A is incorrect. The requirement is to determine the amount of the prior period adjustment. ASC Topic 250 provides that an error in the financial statements requires restatement of the financial statements with an adjusting entry to retained earnings for the earliest period presented. When Raft incorrectly expensed the machine in year 1, earnings before tax was understated by $210,000. Had Raft properly capitalized this asset, it would have recorded $20,000 depreciation expense per year in year 1, year 2, and year 3. Depreciation expense is calculated on a straight-line basis as $20,000 [($210,000 - $10,000)/10 years] per year. Over the three years, Raft would have recorded a total of $60,000 of depreciation expense. Therefore, as of January 2, year 4, expenses have been overstated by $150,000 ($210,000 - $60,000), and the tax effect of the adjustment is 30% x $150,000, or $45,000. Therefore, the prior period adjustment to retained earnings net of taxes is $105,000 ($150,000 - $45,000).
A is incorrect. The requirement is to determine the amount of the prior period adjustment. ASC Topic 250 provides that an error in the financial statements requires restatement of the financial statements with an adjusting entry to retained earnings for the earliest period presented. When Raft incorrectly expensed the machine in year 1, earnings before tax was understated by $210,000. Had Raft properly capitalized this asset, it would have recorded $20,000 depreciation expense per year in year 1, year 2, and year 3. Depreciation expense is calculated on a straight-line basis as $20,000 [($210,000 - $10,000)/10 years] per year. Over the three years, Raft would have recorded a total of $60,000 of depreciation expense. Therefore, as of January 2, year 4, expenses have been overstated by $150,000 ($210,000 - $60,000), and the tax effect of the adjustment is 30% x $150,000, or $45,000. Therefore, the prior period adjustment to retained earnings net of taxes is $105,000 ($150,000 - $45,000).
A is incorrect. The requirement is to determine the amount of the prior period adjustment. ASC Topic 250 provides that an error in the financial statements requires restatement of the financial statements with an adjusting entry to retained earnings for the earliest period presented. When Raft incorrectly expensed the machine in year 1, earnings before tax was understated by $210,000. Had Raft properly capitalized this asset, it would have recorded $20,000 depreciation expense per year in year 1, year 2, and year 3. Depreciation expense is calculated on a straight-line basis as $20,000 [($210,000 - $10,000)/10 years] per year. Over the three years, Raft would have recorded a total of $60,000 of depreciation expense. Therefore, as of January 2, year 4, expenses have been overstated by $150,000 ($210,000 - $60,000), and the tax effect of the adjustment is 30% x $150,000, or $45,000. Therefore, the prior period adjustment to retained earnings net of taxes is $105,000 ($150,000 - $45,000).
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