Question

In 2018, due to a change in marketing forecasts, Barney Corporation reduced the projected life of its patent for producing round dice. The cumulative patent amortization prior to 2018 would have been $21 million higher had the new life been used. Barney's tax rate is 35%. Barney's retained earnings as of December 31, 2018, would be (Round million answer to 2 decimal places.):

Answer 1

Answer:

Barney's corporation retained earnings would be overstated by $13.65 million

Explanation:

First of all this cumulative amortization that is being putted on the patent represents the total amount of amortizations expense which is being charged against this intangible asset(patent in this case) over a period of its useful life.

Now because of the changes in marketing forecast , the Barney Corporation decided to reduce the useful life of the patent, earlier if the life would have not been reduced then the cumulative amortization expense on the patent would have been $21 million higher than it is now, which means Barney corporation now has to charge less expenses because now the projected life of patent has been reduced, that leads to the higher profits for the corporation because no the expenses are less. Now we will charge 35% of tax rate on this $21 million which is leading to overestimating the retained earnings of the corporation ,

barney's retained earnings =   $21 million - $21 million x 35%

                                             = $21 million -  $21 x 35/100

                                             = $21 million - $7.35

                                             = $13.65 million