Answer:
Understated by $14 million.
Explanation:
Accumulated depreciation 20,000,000
Deferred tax liability 6,000,000
Retained earnings 14,000,000
Answer:
B. understated by $14 million.
Explanation:
The options given are
A. overstated by $6 million.
B. understated by $14 million.
C. understated by $6 million.
D. overstated by $14 million.
When entry are posted to accumulated depreciation, the corresponding entry is posted to the depreciation expense account. These are credit and debit respectively. As such, when accumulated depreciation is overstated, depreciation also is overstated by the same amount ($20 million).
This will reduce the net income before tax by $20 million as well. If the tax rate is 30%,
amount of understatement in tax expense is
= 30% * $20 million,
= $6 million
as such net income after tax is understated by
= $20 million - $6 million
= $14 million
