Question

On July 1, 2018, Boone Company acquired the following assets from Judge Company for $8,000,000:

	CV of assets on Judge’s book on 6/30/18	Appraised FV of assets on 7/1/18
Land	$   500,000	$6,000,000
Office Building	2,000,000	$1,000,000
Warehouse	$3,000,000	$1,500,000
Equipment	$2,000,000	$1,500,000

Boone’s accountant was not sure how to value the assets, so he decided to simply expense everything and hope that no one would notice. During the annual external audit in January 2021, the new auditing firm discovered the error.

Boone’s policy regarding these types of fixed assets follows:

Asset	Depreciation method	Residual (salvage) Value	Useful life from date of acquisition
Office building	DDB	$100,000	10 years
Warehouse	Straight-line	$50,000	7 years
Equipment	Straight-line	$0	5 years

Prepare the entry(ies) that must be made to correct Boone’s accounting records with detailed works.

Answer 1

correct journal entry for acquisition of asset:-

land a/c Dr 6,000,000

office building a/c Dr 1,000,000

warehouse a/c Dr 1,500,000

equopment a/c Dr 1,500,000

to bank a/c Cr 8,000,000

to capital reserve Cr 2,000,000

(being assets purchased and difference transfer to capital reserve)

actual entry done:-

expense a/c Dr 8,000,000

to bank a/c Cr 8,000,000

(being expense recorded)

profit and loss a/c Dr 8,000,000

to expense a/c Cr 8,000,000

(being expense transfered to profit and loss a/c)

NOTE:- due to this wrong entry general reserve will be having decreased figure by $ 8,000,000/- in year 2021 i.e.

general reserve a/c Dr 8,000,000

to profit and loss a/c Cr 8,000,000

(being balance of profit and loss transfer to general reserve)

value of assets as on january 2021:-

land :- no change because no rate of depreciation is given.

office building:-

cost = 1,000,000

residual value= 1,00,000

depreciable value= 9,00,000

depreciation rate= 100/10years= 10

multiply 10 by 2= 20% per annum till we reach the resudual value.

depreciation for year 2018= 1,000,000*6/12*20/100= 1,00,000

depreciation for year 2019= (1,000,000-100000)*12/12*20/100= 1,80,000

depreciation for year 2020= (1,000,000-1,00,000-1,80,000)*12/12*20/100= 1,44,000

value as on 2021 january= 1,000,000-1,00,000-1,80,000-1,44,000= 5,76,000

warehouse:-

cost=1,500,000

salvage value= 50,000

depreciable amount= 1,5000,000-50,000= 1,450,000

depreciation amount per year= 1,450,000/7years= 207142.86 per annum.

depreciatio till jaunuary 2021= 207143*2.5= 517857

book value as on january 2021= 1,500,000-5,17,857= 9,82,143

equipment:-

book value= 1,500,000

salvage value=0

depreciation per year= 1,500,000/5= 3,00,000 per annum.

depreciation till january 2021= 3,00,000*2.5= 7,50,000

value as on january 2021= 1,500,000-7,50,000= 7,50,000

rectification entry:-

land a/c Dr 6,000,000

office building a/c Dr 5,76,000

warehouse a/c Dr 9,82,143

equipment a/c Dr 7,50,000

to general reserve a/c Cr 83,08,143

(being entry rectified and assets brought in books and also general reserve increased because og wrong entry done in past year 2018)