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In year 1, Regal Corporation purchased equipment for $100,000. Regal appropriately debited the equipment account in year 1. The equipment had a 10-year life with no residual value. In year 3, Regal discovered that it did not record depreciation expense or tax depreciation in year 1 and year 2. Straight-line depreciation is used. Regal's tax rate is 40%. What is the tax effect of the prior period adjustment in year 3?

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abiolataiwo2015

The tax effect of the prior period adjustment in year 3 is to Increase income tax receivable by $8,000.

First step is to calculate the depreciation expense

Depreciation expense is understated in years 1 and year 2 by $20,000 ($10,000 each year) calculated as:

Depreciation expense=($100,000/10 years)x 2 years

Depreciation expense= $10,000x 2 years

Depreciation expense = $20,000

Second step is to calculate the tax effect of the prior period adjustment in year 3:

Tax effect=40% × $20,000

Tax effect= $8,000

Based on the above calculation the prior period adjustment in year 3  is to increase income tax receivable by $8,000.

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https://brainly.com/question/14701792

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