Question

In 2021, the internal auditors of Guzi Company discovered the following material error made in a prior year:

Equipment was purchased on January 1, 2019, for $100,000. The purchase was incorrectly recorded as a debit to repair and maintenance expense. The equipment has a useful life of five years and no residual value. Guzi Company uses the straight-line method of depreciation for all depreciable assets.

The journal entry Guzi Company would prepare at December 31, 2021 to correct the error (ignore income taxes) would include a:

		Debit to equipment of $80,000.
		Credit to accumulated depreciation of $40,000.
		Credit to retained earnings of $80,000.
		Credit to repair and maintenance expense of $100,000.

Answer 1

As per the given scenario, the purchase of Equipment is incorrectly recorded as debit to repairs and maintainance, whereas it should have been debited to the equipment.

As on Dec 31 2021, which is the 2nd year end since the machine has been purchased, the depreciation needed to calculated for 2 years.

Depreciation (Straight Line Method) =( Asset Value - Salvage Value) / no of yeasr of Life of asset

Since there is no Salvage Value of the Asset, the Depreciation would be $ 20000 per year i.e., $40000 for 2 years.

Following are the rectifications adviced :

1. Debit to Equipment with $100000

2. Then we need to Credit Equipment with $40000 and Debit Accumulated Depreciation Account with $40000

3. There after we need to Credit Accumulated Depreciation Account with $ 40000 and Debit Depreciation Expense Account with $40000

Please Select option (b) Credit to accumulated depreciation of $40,000

Hope the above solution helps. As I have comprehensively rectified the situation.