Intermediate Accounting
Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Chapter 11, Problem 11.11P

Requirement – 1

To determine

Errors:

An error is a mistake committed in the process of book-keeping or in accounting.  In some cases, errors may occur but, they will not affect the totals of the trial balance. Such an error can be found while preparing the trial balance or would be indicated by the unusual account balance.

Depreciation:

It refers to the reduction in the monetary value of fixed tangible assets over its useful life due to its wear and tear or, obsolescence. In other words, it is the method of distributing the cost of tangible fixed assets over its estimated useful life.

To prepare: The appropriate correcting entry for the equipment capitalization error discovered in 2018.

Requirement – 1

Expert Solution
Check Mark

Explanation of Solution

The appropriate correcting journal entries for the equipment are as follows:

Purchase of equipment

Purchase of equipment made in the year 2016
Correct entry Incorrect entry
Accounts title and explanation

Debit

($)

Credit

($)

Accounts title and explanation

Debit

($)

Credit

($)

Equipment 1,900,000   Equipment 2,000,000  
Expense 100,000           Cash   2,000,000
        Cash   2,000,000      
(To record the purchase of equipment.) (To record the purchase of equipment.)

Table (1)

Accumulated depreciation - 2016:

Depreciation  in the year 2016
Correct entry Incorrect entry
Accounts title and explanation

Debit

($)

Credit

($)

Accounts title and explanation

Debit

($)

Credit

($)

Expense 475,000   Expense 500,000  

         Accumulated

         depreciation

  475,000

        Accumulated

        depreciation

  500,000
(To record the depreciation.) (To record the depreciation.)

Working note

Depreciation =(Cost of equipment ×Depreciationrate)= $1,900,000×25%=$475,000

Working note

Depreciation =(Cost of equipment ×Depreciationrate)= $2,000,000×25%=$500,000

Note: Depreciation is twice the straight-line rate of 12.5%.

Table (2)

Accumulated depreciation - 2017:

Depreciation  in the year 2017
Correct entry Incorrect entry
Accounts title and explanation

Debit

($)

Credit

($)

Accounts title and explanation

Debit

($)

Credit

($)

Expense 356,250   Expense 375,000  

      Accumulated

      depreciation

  356,250

        Accumulated

        depreciation

  375,000
(To record the depreciation.) (To record the depreciation.)

Working note

Depreciation =((Cost of equipment– Accumulated depreciation(2016)) ×Depreciationrate)=(( $1,900,000$475,000)×25%)=$356,250

Working note

Depreciation =((Cost of equipment– Accumulated depreciation(2016)) ×Depreciationrate)=(( $2,000,000$500,000)×25%)=$375,000

Note: Depreciation is twice the straight-line rate of 12.5%.

Table (3)

Correcting entry for equipment, and accumulated depreciation

The following entry is prepared to correct the incorrect accounts.

Correct entry
Accounts title and explanation

Debit

($)

Credit

($)

Retained earnings 56,250  
Accumulated depreciation (1) 43,750  
            Equipment   100,000
(To correct the incorrect accounts)

Table (4)

In the two-year period, the depreciation expense is overstated by $43,750 and the expenses are understated by the $100,000. Therefore, when both were compared, the net income and retained earnings is overstated by $56,250 ($100,000$43,750) . The accumulated depreciation was overstated during the two-year period.

Working note:

Determine the amount overstated.

Particulars Correct amount Incorrect amount Difference
Depreciation 2016 475,000 500,000 25,000
Depreciation 2017 356,250 375,000 18,750
Total     43,750

Table (5)

(1)

Requirement – 2

To determine

To prepare: The journal entry related to the change in deprecation method.

Requirement – 2

Expert Solution
Check Mark

Explanation of Solution

Adjusted journal entry for depreciation expenses is as follows:

Date Accounts title and explanation

Debit

($)

Credit

($)

  Depreciation Expense (2) 178,125  
          Accumulated depreciation   178,125
  (To record the depreciation.)

Table (6)

  • Depreciation expense decreases the stockholder’s equity. Therefore, debit the depreciation expense with $178,125.
  • Accumulated depreciation –Equipment is a contra asset. It decreases the value of asset account. Therefore, credit accumulated depreciation – Equipment with $178,125.

Working note:

Determine the amount of depreciation

The change in depreciation method accounts for change in the accounting estimate. The financial statements made previously are not revised. Presently, the company uses straight-line method. The un-depreciated cost at the time of the change must be depreciated and for the remaining life, straight-line method depreciation is used. All these changes must be recorded in the disclosure note. Therefore, the depreciation for 2018-2023 is determined as follows:

Particulars Amount ($)
Asset’s cost 1,900,000
Less: Accumulated depreciation to date (831,250)
Un-depreciated cost, January 1, 2018 1,068,750
Estimated residual value (0)
Less: To be depreciated over remaining 6 years 1,068,750
Estimated remaining life (2018-2020) ÷6years
Annual straight- line depreciation 2018-2023 178,125

Table (7)

(2)

Conclusion

Therefore, the adjusted journal entry for depreciation expenses is recorded.

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Chapter 11 Solutions

Intermediate Accounting

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