Question

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 machine 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 2011 and depreciation expense has not yet been recorded for 2011. 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.

Answer 1

Answer:-

a) Journal Entry for correction of error:-

Particulars	Debit ($)	Credit ($)
Machine A/c Dr.	8,000
To Repair Expense A/c		8,000
(Being rectification entry passed for capitalizing installation charges of Machine which were erroneously debited to Repairs Expense in 2010)

b) Depreciation Expense in 2011:-

Depreciation provided in 2010 = Cost - Scrap Value / Estimated Useful Life = 29000 - 0 /10 = $2,900

In 2011:-

Cost of Asset = $37,000 [29000+8000]

Remaining useful life = 15 years

Scrap Value = NIL

Depreciation Expense = Cost - Scrap Value - Depreciation of Year 2010 / Estimated Useful Life

= 37000-0-2900/15 = 37000/15 = $ 2,273.33

Journal Entry:-

Particulars	Debit ($)	Credit ($)
Depreciation A/c Dr.	2,273.33
To Accumulated Depreciation A/c		2,273.33
(Being depreciation provided for 2011)

Alternatively;

Particulars	Debit ($)	Credit ($)
Depreciation A/c Dr.	2,273.33
To Machinery A/c		2,273.33
(Being depreciation provided for 2011)