Question

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.

Answer 1

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