In: Accounting
On January 1,20X6 ,the company sold for 1,800 a piece of equipment costing 3,900. At the date of sale of the equipment had accumulated depreciaition of 2,400. The company recorded the cash received as other revenue in 20X6. Also, the company continued to record depreciation for this equipment in both 20X6 and 20X7 at the rate of 10% of cost.
Recording correcting entries on Dec31,20X7
Case 1: When the company has not yet closed the 20X7 books.
Case 2: When the company has closed the 20X7 books.
Solution:
On January 1,20X6
Company sold a piece of equipment for 1,800
Cost of equipment 3,900
Accumulated depreciation on equipment 2,400
Value of equipment on date of sale
= Cost of equipment - Accumulated depreciation
= 3,900-2,400
= 1500
Profit on sale of equipment
= Sale price of equipment- Value of equipment on date of sale
= 1,800- 1500
= 300
As the equipment has been sold on January 1, 2016, ideally no depreciation should be charged on equipment afterwards.
Case 1: When the company has not yet closed the 20X7 books.
Wrong transaction recorded in books in 20X6
Cash from sale of equipment that is 1800 included as other revenue in 20X6.
Journal Entry passed would be:
-Cash Account Debit 1800
Revenue Account Credit 1800
-Revenue Account Debit 1800
Profit / Loss Account Credit 1800
Depreciation recorded= 3900 x 10% = 390
Journal Entry passed would be:
Depreciation Account 390
Accumulated Depreciation Account 390
Wrong transaction recorded in books in 20X7
Depreciation recorded= 3900 x 10% = 390
Journal Entry passed would be:
Depreciation Account 390
Accumulated Depreciation Account 390
Correcting Journal Entries
On Dec31, 20X7
Transaction Number |
Account Titles |
Debit |
Credit |
- |
Profit / Loss Account |
1800 |
|
Revenue Account |
1800 |
||
(Reverse entry for wrongly recorded revenue) |
|||
- |
Cash |
1800 |
|
Equipment |
1500 |
||
Profit on sale of equipment |
300 |
||
(Correct entry for sale of equipment) |
|||
- |
Profit on sale of equipment |
300 |
|
Profit / Loss Account |
300 |
||
(Transfer of profit to income statement) |
|||
- |
Accumulated Depreciation Account |
390 |
|
Depreciation Account |
390 |
||
(Reverse entry for wrongly recorded revenue) |
Case 2: When the company has closed the 20X7 books.
Correcting Journal Entries
On Dec31, 20X7
Transaction Number |
Account Titles |
Debit |
Credit |
- |
Retained earnings- error correction (1800 +390) |
2190 |
|
Equipment |
1500 |
||
Profit on sale of equipment |
300 |
||
Depreciation |
390 |