Question

In 2016, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $252,000 cost of a machine purchased on January 1, 2013. The machine’s useful life was expected to be four years with no residual value. Straight-line depreciation is used by PKE.

Ignoring income taxes, prepare the journal entry PKE will use to correct the error. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Correct entries that should have been recorded and incorrect entries as recorded are shown as follows:-

Year	Should Have Been Recorded	As Recorded
2013	Equipment $252,000	Expense $252,000
	Cash $252,000	Cash $252,000
2013	Expense (Dep) (252k/4) $63,000	Entry Omitted
	Accumulated Dep $63,000
2014	Expense $63,000	Entry Omitted
	Accumulated Dep $63,000
2015	Expense $63,000	Entry Omitted
	Accumulated Dep $63,000

During 2013 to 2015 year end (three year period), depreciation expense has been understated by $189,000 ($63,000*3 yrs) but other expenses was overstated by $252,000, so net income during the period was understated by 63,000 ($252,000 - $189,000) (i.e. retained earnings are understated by $63,000). The accumulated depreciation was also understated by $189,000 during the three year period.

Journal entry to correct the above error is shown as follows:-

Equipment $252,000

Accumulated Depreciation ($63,000*3) $189,000

Retained Earnings ($252,000-$189,000) $63,000