Question

Hendry Corp. reported net incomes for the last three years as follows: 2018 2017 2016 $180,000 $240,000 $225,000 During the 2018 year-end audit, Hendry's newly appointed auditors discover that Hendry bought a machine on January 1, 2015 for $125,000 cash, with a $25,000 estimated residual value and a five-year life. The company debited an expense account for the entire cost of the asset. Hendry uses straight-line depreciation for all machinery. Instructions (Ignore all income tax effects) a) Prepare the general journal entry required to correct the books for this situation, assuming that the books have not been closed for 2018. b) Prepare a schedule showing, for each of the years 2016 to 2018, income before the effect of any accounting changes, the effect of the accounting changes, and the income after the effect of any accounting changes. c) Assume that the retained earnings balance at January 1, 2018 is $720,000 (before any adjustment). At what adjusted amount should this beginning retained earnings balance be shown on the financial statements?

Answer 1

a. In the books of Hendry Corp. :

Date	Account Titles	Debit	Credit
		$	$
December 31, 2018	Depreciation Expense	20,000
	Accumulated Depreciation: Machinery		20,000

b. Annual depreciation on the machinery = $ ( 125,000 - 25,000 ) / 5 = $ 20,000.

	2016	2017	2018
Income before accounting changes	$ 225,000	$ 240,000	$ 180,000
Effect of accounting changes	(20,000)	(20,000)	(20,000)
Income after accounting changes	$ 205,000	$ 220,000	$ 160,000

c. Adjusted amount at which retained earnings balance will be carried in the financial statements: $ 785,000.

Unadjusted Retained Earnings Balance, January 1, 2018	$ 720,000
Add: Capital Expenditure wrongly charged as Revenue Expenditure	125,000
Less: Depreciation Expense for 2015, 2016, 2017	(60,000)
Adjusted Retained Earnings Balance, Januar 1, 2018	$ 785,000

Retained earnings balance as on December 31, 2018 = $ 785,000 + $ 160,000 = $ 945,000.