Question

1) ABC Co. purchased machinery that cost $200,000 on January 1, 2018. The entire cost was recorded as an expense. The machinery has a nine-year life and a $10,000 residual value. The error was discovered on December 20, 2021. Ignore income tax considerations.

ABC’s income statement for the year ended December 31, 2021, should show depreciation expense of          _______

3) Equipment was purchased at the beginning of 2018 for $900,000. At the time of its purchase, the equipment was estimated to have a useful life of five years and a salvage value of $100,000. The equipment was depreciated using the straight-line method of depreciation through 2021. At the beginning of 2022, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $30,000. The amount to be recorded for depreciation for 2022 is _______

7) XYZ Co. began operations on January 1, 2020. Financial statements for 2020 and 2021 contained the following errors:

                                        Dec. 31, 2020             Dec. 31, 2021   

     Ending inventory $198,000 overstated $219,000 understated

     Depreciation expense 126,000 overstated               —

                                                    

No corrections have been made for any of the errors. Ignore income tax considerations.

The total effect of the errors on the balance of XYZ’s retained earnings at December 31, 2021 is overstated or understated by          _______

Answer 1

Answer to Question 1

Depreciation amount per year = (Cost - Residual Value) / Useful life

i.e. = (2,00,000 - 10,000) / 9 = $ 21,111.11 per year for 9 years.

In ABC’s income statement for the year ended December 31, 2021, it should show depreciation expense of 2018-2021 i.e. 4 years. So, depreciation = 21,111.11 * 4 = $ 84,444.44

Answer to Question 3

Depreciation for 2018 - 2021 = (Cost - Residual Value) / Useful life = (9,00,000 - 1,00,000) / 5 = $ 1,60,000 per year

WDV as on beginning of 2022 = $ 9,00,000 - 1,60,000 * 4 = $ 2,60,000.

Depreciation for 2022 onwards = (2,60,000 - 30,000) / (8-4) = $ 57,500.

Thus, the amount to be recorded for depreciation for 2022 is $ 57,500.

Answer to Question 7

Dec, 31, 2020 :

Ending inventory $198,000 overstated :- that means profit is overstated by $198,000.

Depreciation expense 126,000 overstated :- that means profit is understated by $126,000

Dec, 31, 2021 :

Ending inventory of 2020 is $198,000 overstated :- that means openning inventory of 2021 is $198,000 overstated :- that means profit is understated by $1,98,000

Ending inventory of 2021 $ 219,000 understated :- that means profit is understated by $ 219,000.

Thus, the total effect of the errors on the balance of XYZ’s retained earnings at December 31, 2021 is understated by $ 3,45,000. (198000 - 126000 - 198000 -219000)