At the beginning of 2010, Lipstick Company has installation costs of $8,000 on new machine that...

At the beginning of 2010, Lipstick Company has installation costs of $8,000 on new machine that were charged to Repair Expense. Other costs of this machinery of $29,000 were correctly recorded and depreciate with the straight-line method with an estimated life of 10 years and no residual value. At December 31, 2008, Lipstick Company decides that the machinery has remaining useful life of 15 years, starting with January 1, 2011. The book have not been closed for 2018 and depreciation expense has not yet been recorded for 2018. Do not take in to account the impact of taxes.

a) Show the journal entry that Lipstick Company should make in 2011 to correct for the error.
b) Calculate and present the journal entry of Lipstick Company’s depreciation expense in 2011 for machinery acquired in 2010.

Solutions

Expert Solution

Note- in the question it is told that at December 2008 the company decided that the remaining useful life of the machinery will be 15 year from January 2011. But the machine has been purchased in 2010. In my opinion it is a clerical mistake in question. Instead of December 2008, it will be December 2018,as it is more appropriate.

The question has been solved according to the above note.

Note-2--- as the useful life has been changed in 2018 December hence all the effect of change in useful life will be given in 2018 without any retrospective restatement, as per IAS 16.Hence useful life will be considered as 10 year from 2010 to 2017 which will be changed in 2018 whose effect will be given Prospectively.

a. Corrective journal entry to be given in 2011 beginning-

I. Plant and machinery a/c Dr. -------- 8000

To Repairs account(prior period) ------ 8000

(for recording the correct entry)

II. Depreciation(prior period) Dr. ---------800

Plant and machinery a/c-------------800

Due to this adjustment now the plant and machinery account balance will be 33300 in begin of 2011.

b. Journal entry for depreciation expenses in 2011

depreciation a/c Dr. ------------3700

To plant and machinery-------------3700

note : 33300 to be depreciated in next 9 year

ekkarill92 answered 2 years ago

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