Question

At the beginning of 20X1, Monterey Company purchased a new piece of equipment at a cost of $50,000. The equipment was expected to have a ten-year life and no salvage value. Unfortunately, the bookkeeper at Monterey erroneously recorded the purchase of the equipment with a debit to maintenance expense. This error was not discovered until the 20X6. The company had planned to use the Straight-line method of depreciation for both financial statement and tax reporting purposes. The company is in a 40 percent tax bracket.

REQUIRED:
1.   Prepare the journal entry needed to record the correction of the error.

2. What is the amount for depreciation expense in 20X6 (the current year)?

3. What is the amount for depreciation expense in 20X7 (the following year)?

Answer 1

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	Required 1	Correction Journal entry
		Date	Account title and explanation	Debit $	Credit $
			Equipment	50,000
			Maintenance Expense		50,000
			(To record the correction entry for error made at the time of purchase of equipment which was debited to maintenance expenses instead of equipment)
	Required 2	Computation of Depreciation as per books
		Year	Depreciation= Cost-Salvage Value                       Life of asset
		1	5,000
		2	5,000
		3	5,000
		4	5,000
		5	5,000
		6	5,000
		7	5,000
		8	5,000
		9	5,000
		10	5,000
		So the depreciation for 20x6 is $ 5,000
	Required 3	Based on the above depreciation computation the depreciation for 20x7 is $ 5,000