Question
Assume that a machine that cost the Bailey Retail Company $10,000 (with a 10-year estimated life was purchased on January 1, 2012. Further assume that
Assume that a machine that cost the Bailey Retail Company $10,000 (with a 10-year estimated life was purchased on January 1, 2012. Further assume that the total cost was erroneously debited to an expense account in 2012. The error is discovered on December 29, 2015. Assume that income tax effects are recorded separately and the company uses straight line depreciation. a) Prepare the adjustment entry for December 29, 2015 on a before tax basis. b) Assume that the same error was made on the income tax return. Calculate the net pretax under or overstatement and prepare the entry to record the income tax effect of the prior period adjustment, assuming a 30 percent income tax rate. c) Show how the prior period adjustment will be reported. The following additional information is available to you. i) Retained earnings, January 1, 2015, as previously reported $378,800 ii) Net Income $81,200 iii) Cash dividend declared and paid during 2015 is $30,000
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