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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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The following are independent errors:

  1. a. In January 2019, repair costs of $9,000 were debited to the Machinery account. At the beginning of 2019, the book value of the machinery was $100,000. No residual value is expected, the remaining estimated life is 10 years, and straight-line depreciation is used.
  2. b. All purchases of materials for construction contracts still in progress have been immediately expensed. It is discovered that the use of these materials was $10,000 during 2018 and $12,000 during 2019.
  3. c. Depreciation on manufacturing equipment has been excluded from manufacturing costs and treated as a period expense. During 2019, $40,000 of depreciation was accounted for in that manner. Production was 15,000 units during 2019, of which 3,000 remained in inventory at the end of the year. Assume there was no inventory at the beginning of 2019.

Required:

Prepare journal entries for the preceding errors discovered during 2020. Ignore income taxes.

To determine

Journalize the correction of errors in the given independent situations.

Explanation

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the correction of errors in the given independent situations.

a.

Journal entry to correct the failure to expense cost of the machine:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
  Retained Earnings 8,100 
  Accumulated Depreciation 900 
   Machinery  9,000
  (Record expensing the capitalized costs and decrease overstated retained earnings)   

Table (1)

Description:

  • Retained Earnings is an equity account. Since repair expenses which should have been expensed are capitalized, the net income in the prior years was overstated. The equity account is debited to decrease the overstated value.
  • Accumulated Depreciation is a contra-asset account. Since the accumulated depreciation is reduced due to reduced book value of machinery, contra-asset account value decreased, hence, the account is debited.
  • Machinery is an asset account. Since machine book value is reduced, asset account decreased, and a decrease in asset is credited.

Working Note:

Compute the depreciation expense for the machine under straight-line method for two years, if cost to be expensed is $9,000, useful life is 10 years, and no salvage value.

Depreciation expense=[(Cost–Salvage value)×1Useful life]=[($9,000$0)×110 years]=$900

b.

Journal entry to correct the failure to capitalize the purchases of materials for construction contracts:

DateAccount Titles and ExplanationPost Ref

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