Question

XYZ's net incomes for the past 3 years are presented below: 2015 $360,000 2016 $450,000 2017 $480,000 During the 2018 year-end audit, the following item come to your attention: XYZ bought equipment on January 1, 2015 for $294,000 with a $24,000 salvage value and a 6 year life. The company debited an expense account an credited cash on the purchase date for the entire cost of the asset. XYZ depreciates assets using the straight- line method Required: a. Prepare 2018 journal entry to correct the error.

Answer 1

As on 2018 the following should be recorded:

Equipment with $294,000.

Depreciation expense for 2018 with $45,000 (ie. [$294,000 - $24,000] / 6)

Accumulated depreciation for 4 years from 2015 to 2018, $45,000 X 4 years = $180,000

Account	Debit	Credit
Equipment	$294,000	-
Depreciation expense	$45,000	-
Accumulated depreciation	-	$180,000
Retained earnings (balancing figure)	-	$159,000