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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Soon after December 31, 2019, the auditor requested a depreciation schedule for trucks of Jarrett Trucking Company, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2016 to 2019, inclusive. The following data were in the Trucks account as of January 1, 2016:

Chapter 11, Problem 18P, Soon after December 31, 2019, the auditor requested a depreciation schedule for trucks of Jarrett

The Accumulated Depreciation—Trucks account, previously adjusted to January 1,2016, and duly entered in the ledger, had a balance on that date of $16,460. This amount represented the straight-line depreciation on the four trucks from the respective dates of purchase, based on a 5-year life and no residual value. No debits had been made to this account prior to January 1, 2016.

Transactions between January 1,2017, and December 31, 2019, and their record in the ledger were as follows:

  1. 1. July 1, 2016: Truck no. 1 was sold for $1,000 cash. The entry was a debit to Cash and a credit to Trucks, $1,000.
  2. 2. January 1, 2017: Truck no. 3 was traded for a larger one (no. 5) with a 5-year life. The agreed purchase price was $12,000. Jarrett paid the other company $1,780 cash on the transaction. The entry was a debit to Trucks, $1,780, and a credit to Cash, $1,780.
  3. 3. July 1, 2018: Truck no. 4 was damaged in a wreck to such an extent that it was sold as junk for $50 cash. Jarrett received $950 from the insurance company. The entry made by the bookkeeper was a debit to Cash, $1,000, and credits to Miscellaneous Revenue, $50, and Trucks, $950,
  4. 4. July 1, 2018: A new truck (no. 6) was acquired for $20,000 cash and debited at that amount to the Trucks account. The truck has a 5-year life.

Entries for depreciation had been made at the close of each year as follows: 2016, $8,840; 2017, $5,436; 2018, $4,896; 2019, $4,356.

Required:

  1. 1. Next Level For each of the 4 years, calculate separately the increase or decrease in earnings arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks.
  2. 2. Prove your work by one compound journal entry as of December 31, 2019; the adjustment of the Trucks account is to reflect the correct balances, assuming that the books have not been closed for 2019.

1.

To determine

Compute the effect of earnings (increase or decrease) of Company J that arise from the company’s error in determining the depreciation of the truck.

Explanation

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:

YearIncrease or decrease
2016$(2,600) Decrease
2017$496 Increase ($2,540$2,044)
2018$(7,094) Decrease ($5,050$2,044)
2019$(2,044) Decrease

Table (1)

Compute the correct depreciation:

Truck2016201720182019
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 ($4,000×612)$4,000 (6)
Total$8,8407,4806,9406,400
Depreciation recorded previously8,8405,4364,8964,356
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:

DateAccount Title and ExplanationPost Ref

Debit

($)

Credit ($)
 Correct entry:   
July 1, 2016Cash 1,000 
 Accumulated Depreciation- Truck (2) 8,400 
 Loss on disposal of plant property, equipment ($8,400+$1,000$12,000) 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 
 Retained Earnings  2,600 
 Truck (Number 1)  11,000
 (To record the accumulated depreciation)   
     
 Correct entry:   
January 1, 2017Accumulated Depreciation: Trucks ($2,560 (1)×2 years) 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, 2018Accumulated Depreciation –Truck (Number 4)  (4) 9,000 
 Cash 1,000 
 Loss on disposal of plant property, equipment ($9,000+$1,000

2.

To determine

Prepare a correcting compound journal entry as of December 31, 2019.

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