Concept explainers
Requirement – 1
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
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
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)
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 |
Working note |
||||
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 |
Working note |
||||
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 ($) |
Credit ($) |
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 $56,250
Working note:
Determine the amount overstated.
Particulars | Correct amount | Incorrect amount | Difference |
Depreciation 2016 | 475,000 | 500,000 | 25,000 |
Depreciation 2017 | 356,250 | 375,000 | 18,750 |
Total | 43,750 |
Table (5)
(1)
Requirement – 2
To prepare: The
Requirement – 2
Explanation of Solution
Date | Accounts title and explanation | Debit ($) |
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) | |
Annual straight- line depreciation 2018-2023 | 178,125 |
Table (7)
(2)
Therefore, the adjusted journal entry for depreciation expenses is recorded.
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Chapter 11 Solutions
GEN COMBO INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD
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