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Hi all,
I am getting tripped up by what seems like such a simple question:
FAR-31. Holt Co. discovered that in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 20%. How should Holt report the correction of error in the current year?
A. As an increase in accumulated depreciation of $32,000.
B. As an increase in accumulated depreciation of $40,000.
C. As an increase in depreciation expense of $32,000.
D. As an increase of depreciation expense of $40,000.The answer is B. I totally understand that we debit retained earnings and credit accumulated depreciation, but I selected A since I accounted for it as net of tax. Most prior period adjustments take into account the income tax effect. Now I understand that book & tax depreciation are different. Is that the reason why it’s B (the gross amount)?
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