Answer:
The amount of the credit to retained earnings is $1,935,000.
Explanation:
Cost of the machine = $2,580,000
Machine's useful life = 12
Annual depreciation expenses = Cost of the machine / Machine's useful life = $2,580,000 / 12 = $215,000
Since the error is discovered during year 4 (after 3 years), this implies that we have to calculate total depreciation expenses for 3 years first as follows:
Total depreciation expenses for 3 years = Annual depreciation expenses * 3 = $215,000 * 3 = $645,000
The amount of the credit to retained earnings can now be calculated as follows:
Amount of the credit to retained earnings = Cost of the machine - Total depreciation expenses for 3 years = $2,580,000 - $645,000 = $1,935,000
Therefore, the amount of the credit to retained earnings is $1,935,000.
