Due to an error in computing depreciation expense, Prewitt Corporation overstated accumulated depreciation by $20 million as of December 31, 2021. Prewitt has a tax rate of 30%. Prewitt's retained earnings as of December 31, 2021, would be:

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

Understated by $14 million.

Explanation:

Accumulated depreciation 20,000,000

Deferred tax liability 6,000,000

Retained earnings 14,000,000