Question

combos Company purchases a delivery truck for $12,000 on January 1, 2019. combos expects to use the truck only two years and to sell it for $4,000. The company’s policy is to use straight-line depreciation but depreciation in 2019 is not recorded. Rather, the accountant charges the entire cost to delivery expense in 2019. The controller discovers the error late in 2020.

REQUIRED:

Provide the 2020 entries to record depreciation and the error correction and indicate the amounts of the prior period adjustments appearing in the 2019 and 2020retained earnings sections of the statement of stockholders’ equity. The tax rate is 25%.

Answer 1

rectification entries on Dec 31, 2020:
1) to reverse entry on Dec 31, 2019:
	Accounts Title	Debit $	Credit $
Debit	Delivery Truck	12000
Credit	Retained Earning		12000
2) depreciation entry for year 2019:
Debit	Retained Earning	4000
Credit	Acc. Dep.-DT		4000
	(12000-4000)*50%
3) tax payable on excess expense claimed in 2019:
Debit	Retained Earning	2000
Credit	Income Tax payable		2000
	(12000-4000)*25%
4) Depreciation entry for 2020:
Debit	Depreciation expense	4000
Credit	Acc. Dep.-DT		4000
5) Sale of Delivery Truck on Dec 31, 2020:
Debit	Cash	4000
Debit	Acc. Dep.-DT	8000
Credit	Delivery Truck		12000
Prior Period adjustment in Retained Earnings:
Year 2020:
Add: Net Income of wrong written off of Deli Truck in 2019 = $6000