1.
Compute the effect of earnings (increase or decrease) of Company J that arise from the company’s error in determining the
1.
Explanation of Solution
Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.
The effect of earnings that arise from the company’s error in determining the depreciation of the truck as follows:
Year | Increase or decrease |
2013 | $(2,600) Decrease |
2014 | $496 Increase |
2015 | $(7,094) Decrease |
2016 | $(2,044) Decrease |
Table (1)
Compute the correct depreciation:
Truck | 2013 | 2014 | 2015 | 2016 |
1. | $1,200 | - | - | - |
2. | $2,080 | $2,080 | $1,040 | - |
3. | $2,560 | - | - | - |
4. | $3,000 | $3,000 | $1,500 | - |
5. | - | $2,400 (5) | $2,400 (5) | $2,400 (5) |
6. | - | - | $2,000 | $4,000 (6) |
Total | $8,840 | 7,480 | 6,940 | 6,400 |
Depreciation recorded previously | 8,840 | 5,436 | 4,896 | 4,356 |
Depreciation Corrected | 0 | $2,044 | $2,044 | $2,044 |
Table (2)
Compute the effort of earnings (increase or decrease) of Company J that arise from the company’s error in determining the depreciation of the truck as follows:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
Correct entry: | ||||
July 1, 2013 | Cash | 1,000 | ||
8,400 | ||||
Loss on disposal of plant property, equipment | 2,600 | |||
Truck (Number 1) | 12,000 | |||
(To record the loss on disposal of plant, property and equipment) | ||||
Entry made: | ||||
Cash | 1,000 | |||
Truck (Number 1) | 1,000 | |||
(To record the sale of truck) | ||||
Correcting entry: | ||||
Accumulated Depreciation: Trucks (2) | 8,400 | |||
2,600 | ||||
Truck (Number 1) | 11,000 | |||
(To record the accumulated depreciation) | ||||
Correct entry: | ||||
January 1, 2014 | Accumulated Depreciation: Trucks | 5,120 | ||
Truck (Number 5) | 12,000 | |||
Cash | 1,780 | |||
Truck (Number 3) | 12,800 | |||
Gain on Exchange (3) | 2,540 | |||
(To record the gain on exchange) | ||||
Entry made: | ||||
Truck | 1,780 | |||
Cash | 1,780 | |||
(To record the cash paid for other company) | ||||
Correcting entry: | ||||
Accumulated Depreciation: Trucks | 5,120 | |||
Truck | 2,580 | |||
Retained Earnings (3) | 2,540 | |||
(To record the accumulated depreciation) | ||||
Correct entry: | ||||
July 1, 2015 | Accumulated Depreciation –Truck (Number 4) (4) | 9,000 | ||
Cash | 1,000 | |||
Loss on disposal of plant property, equipment | 5,000 | |||
Truck (Number 4) | 15,000 | |||
(To record the loss on disposal of plant, property and equipment) | ||||
Entry made: | ||||
Cash | 1,000 | |||
Miscellaneous Revenue | 50 | |||
Truck (Number 4) | 950 | |||
(To record the cash receipt from the damaged truck) | ||||
Correcting entry: | ||||
Accumulated Depreciation –Truck (Number 4) (4) | 9,000 | |||
Retained Earnings | 5,050 | |||
Truck (Number 4) | 14,050 | |||
(To record the accumulated depreciation) |
Table (3)
Working note (1):
Compute the total accumulated depreciation of the trucks:
Truck | Cost (a) | Life (b) | Annual Depreciation (c) | Years Owned (d) | Accumulated Depreciation |
1. | $12,000 | 5 | $2,400 | 3 | $7,200 |
2. | $10,400 | 5 | 2,080 | 2.5 | 5,200 |
3. | $12,800 | 5 | 2,560 | 1 | 2,560 |
4. | $15,000 | 5 | 3,000 | 0.5 | $1,500 |
Total | $16,460 |
Table (4)
Working note (2):
Compute the accumulated depreciation of the trucks for January 1, 2013:
Working note (3):
Compute the gain or loss on exchange:
Working note (4):
Compute the accumulated depreciation of Truck 4:
Cost (a) | Life (b) | Annual Depreciation (c) | Years Owned (d) | Accumulated Depreciation |
$15,000 | 5 | 3,000 | 0.5 (From July 1, 2015 to December 31, 2015) | $1,500 |
$15,000 | 5 | 3,000 | 1 year (2013) | 3,000 |
$15,000 | 5 | 3,000 | 1 year (2014) | 3,000 |
$15,000 | 5 | 3,000 | 0.5 (From January 1, 2015 to July 1, 2015 | $1,500 |
Total | 9,000 |
Table (5)
Working note (5):
Compute the depreciation expenses for truck 5:
Working note (6):
Compute the depreciation expenses of truck 6:
2.
Prepare a correcting compound
2.
Explanation of Solution
Prepare a correcting compound journal entry as of December 31, 2016 as follows:
Date | Account Title and Explanation | Post Ref |
Debit ($) | Credit ($) |
December 31, 2016 | Retained Earnings (7) | 9,198 | ||
Accumulated Depreciation of Trucks (8) | 16,388 | |||
Depreciation expenses (Refer Table (2)) | 2,044 | |||
Truck (9) | 27,630 | |||
(To record the compound entry) |
Table (6)
- Retained earnings are the component of
stockholder’s equity , and it decreases the value of equity. Hence, debit the retained earnings account with $9,198. - Accumulated depreciation is a contra-asset, and it increases the value of assets. Hence, debit the accumulated depreciation account with $16,388.
- Depreciation expense is the component of stockholder’s equity, and it decreases the value of equity. Hence, debit the depreciation expense account with $2,044.
- Truck is an asset account, and it decreases the value of assets. Hence, credit the truck account with $27,630.
Working note (7):
Calculate the total retained earnings:
Working note (8):
Calculate the accumulated depreciation:
Particulars | Amount ($) |
Accumulated depreciation: | |
2013 | 8,400 |
2014 | 5,120 |
2015 | 9,000 |
22,520 | |
Less: corrected depreciation | |
2014 | 2,044 |
2015 | 2,044 |
2016 | 2,044 |
Total | 16,388 |
Table (6)
Working note (9):
Calculate the total cost of truck:
Particulars | Amount ($) |
Cost of truck: | |
2013 | 11,000 |
2014 | 2,580 |
2015 | 14,050 |
Total | 27,630 |
Table (7)
Want to see more full solutions like this?
Chapter 11 Solutions
EBK INTERMEDIATE ACCOUNTING: REPORTING
- Birmingham Company has been in business for five years. Last year, it experienced rapid growth and hired a new accountant to oversee the physical assets and record acquisitions and depreciation. This year, the controller discovered that the accounting records were not in order when the new accountant took over, and a $3,000 depreciation entry was omitted resulting in depreciation expense being understated last year. How does the company make this type of correction and where is it reported?arrow_forwardShannon Corporation began operations on January 1, 2019. Financial statements for the years ended December 31, 2019 and 2020, contained the following errors: In addition, on December 31, 2020, fully depreciated machinery was sold for 10,800 cash, but the sale was not recorded until 2021. There were no other errors during 2019 or 2020, and no corrections have been made for any of the errors. Refer to the information for Shannon Corporation above. Ignoring income taxes, what is the total effect of the errors on the amount of working capital (current assets minus current liabilities) at December 31, 2020? a. working capital overstated by 4,200 b. working capital understated by 5,800 c. working capital understated by 6,000 d. working capital understated by 9,800arrow_forwardIn 2018, internal auditors discovered that PKE Displays, Inc. had debited an expense account for the $350,000cost of equipment purchased on January 1, 2015. The equipment’s life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.Required:1. Prepare the correcting entry assuming the error was discovered in 2018 before the adjusting and closingentries. (Ignore income taxes.)2. Assume the error was discovered in 2020 after the 2019 financial statements are issued. Prepare the correcting entryarrow_forward
- The accountant of Swift Inc. was preparing for the audit of its financial statements for the year ended December 31, 2022, and discovered that an automobile was being incorrectly depreciated. The automobile was purchased on January 1, 2021, for $50,000 and the estimated residual value after five years was expected to be $5,000. The company uses the straight-line basis for depreciating vehicles, but the residual value was not considered when determining the depreciation amount. The financial controller informed the accountant that the company was switching to the double- declining balance method of depreciation for the current and future years, as it was believed this method would more accurately portray the consumption of benefits received from the asset's use. Required: State whether it is a change in accounting estimate/policy or an accounting error. Prepare the journal entries required on December 31, 2022. Ignore income tax effects. Show all workingsarrow_forwardThe financial statements of Apple, Inc. are presented in Appendix A of Financial Accounting. Instructions for accessing and using the company's complete annual report, including the notes to the financial statements, are also provided in Appendix A. the following questions: What were the total cost and book value of property, plant, and equipment at September 27, 2014? Using the notes to find financial statements, what method or methods of depreciation are used by Apple for financial reporting purposes? What was the amount of depreciation and amortization expense for each of the three years 2012-2014? (Hint: Use the statement of cash flows). Using the statement of cash flows, what are the amounts of property, plant, and equipment purchased in 2014 and 2013? Using the notes to the financial statements, explain in the summary how Apple accounted for its intangible assets in 2014. Use the Week 2 Excel® spreadsheet to show your work. Go to http://investor.apple.com. Select the Financial…arrow_forwardsingh enterprises, which started business on 1 January 2016, has a reporting period to 31 december and uses the straight-line method of depreciation. on 1 January 2016, the business bought a machine for £10,000. The machine had an expected useful life of four years and an estimated residual value of £2,000. on 1 January 2017, the business bought another machine for £15,000. This machine had an expected useful life of five years and an estimated residual value of £2,500. on 31 december 2018, the business sold the first machine bought for £3,000. Required: show the relevant income statement extracts and statement of financial position extracts for the years 2016, 2017 and 2018.arrow_forward
- Following an internal audit of Adam Limited, a manufacturing company for the year 2023, the following items were brought to the attention of the Accountant. The Accountant is unsure how to proceed. She has hired you as a consultant to assist her.1.Adam Company changed depreciation methods in 2023 from double-declining-balance to straight-line. The accumulated depreciation prior to 2023 under double-declining-balance was $90,000, whereas the straight-line accumulated depreciation prior to 2023 would have been $50,000. Adam’s depreciable assets had a cost of $250,000, with a $40,000 residual value and an 8-year remaining useful life at the beginning of 2023.Requirements:Discuss the appropriate accounting treatment for the above and prepare the 2023 journal entry related to the depreciable assets , if necessary. Ignore income tax effectsarrow_forwardFollowing an internal audit of Wilkinson Limited, a manufacturing company for the year 2023, the following items were brought to the attention of the Accountant. The Accountant is unsure how to proceed. She has hired you as a consultant to assist her.1. Wilkinson Company changed depreciation methods in 2023 from doubledeclining-balance to straight-line. The accumulated depreciation prior to 2023 under double-declining-balance was $90,000, whereas the straight-line accumulated depreciation prior to 2023 would have been $50,000. Wilkinson’s depreciable assets had a cost of $250,000, with a $40,000 residual value and an 8-year remaining useful life at the beginning of 2023. Requirements:I. Discuss the appropriate accounting treatment for the above. II. Prepare the 2023 journal entry related to the depreciable assets, if necessary. Ignore income tax effects.arrow_forwardFollowing an internal audit of Wilkinson Limited, a manufacturing company for the year 2023, the following items were brought to the attention of the Accountant. The Accountant is unsure how to proceed. She has hired you as a consultant to assist her.1.Wilkinson Company changed depreciation methods in 2023 from double-declining-balance to straight-line. The accumulated depreciation prior to 2023 under double-declining-balance was $90,000, whereas the straight-line accumulated depreciation prior to 2023 would have been $50,000. Wilkinson’s depreciable assets had a cost of $250,000, with a $40,000 residual value and an 8-year remaining useful life at the beginning of 2023.Requirements:Discuss the appropriate accounting treatment for the above. Prepare the 2023 journal entry related to the depreciable assets if necessary. Ignore income tax effects. Show workingsarrow_forward
- Following an internal audit of Wilkinson Limited, a manufacturing company for the year 2023, the following items were brought to the attention of the Accountant. The Accountant is unsure how to proceed. She has hired you as a consultant to assist her. 1. Wilkinson Company changed depreciation methods in 2023 from double- declining-balance to straight-line. The accumulated depreciation prior to 2023 under double-declining-balance was $90,000, whereas the straight-line accumulated depreciation prior to 2023 would have been $50,000. Wilkinson’s depreciable assets had a cost of $250,000, with a $40,000 residual value and an 8-year remaining useful life at the beginning of 2023. Requirements: I. Discuss in detail the appropriate accounting treatment for the above.arrow_forwardFollowing an internal audit of Wilkinson Limited, a manufacturing company for the year 2023, the following items were brought to the attention of the Accountant. The Accountant is unsure how to proceed. She has hired you as a consultant to assist her. 1. Wilkinson Company changed depreciation methods in 2023 from double- declining-balance to straight-line. The accumulated depreciation prior to 2023 under double-declining-balance was $90,000, whereas the straight-line accumulated depreciation prior to 2023 would have been $50,000. Wilkinson’s depreciable assets had a cost of $250,000, with a $40,000 residual value and an 8-year remaining useful life at the beginning of 2023. Requirements: I. Discuss the appropriate accounting treatment for the above. II. Prepare the 2023 journal entry related to the depreciable assets, if necessary. Ignore income tax effects. Show workingsarrow_forwardGinger Ltd is completing its financial statements for the year ended 30 June 2020. In undertaking the accounting work, it becomes apparent that a vehicle that was thought to be on hand at the end of the previous financial year had actually been destroyed in a storm on 21 May 2019. The vehicle had a cost of $64,000 and accumulated depreciation of $16,000. Required: Provide the accounting entries to account for the discover of this prior period error in accordance with IAS 8 / AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. Ignore the tax effect and assume that the value of the vehicle is material to Ginger Ltd. (narrations are not required). ANSWER HERE: Date Account Name Debit Creditarrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College