Maker Co. discovered that in the prior year it incorrectly calculated depreciati

Question

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?

a. Understatement of accumulated depreciation of $25,000.

b. Overstatement of accumulated depreciation of $25,000.

c. Understatement of depreciation expense of $25,000.

d. Overstatement of net income of $16,250.

Explanation / Answer

Maker co reported overstated depreciation expense of $25,000 ($75,000 - $50,000). When depreciation expense is overstated, accumulated depreciation also overstated by $25,000.

Hence,

Therefore, correct option is B

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