Question

12-36

,Phelps . lt is depreciation expense for 2020 Method LOS Brief Exercise 12-36 Whitney Company purchased equipment on January 1, 2020, for $90,000. This equipment has a and a residual value of $5,000. The company uses the straight-line depreciation method. In 2021. the usefaul life of tea pany discovered that it had incorrectly recorded depreciation for 2020 as S580·Igor the correcting entry on January 1, 2021. し06 ing income taxes, record e Error Correction LO6

Answer 1

Actual depreciation expense per year is ($90,000 - $5,000)/10 years = $8,500 per year

But the depreciation expense recorded in 2020 is $5,800.

Depreciation expense understated is $8,500 - $5,800 = $2,700

Since the depreciation expenditure is understated, the profits ie. Retained earnings for year 2020 will be more.

The rectification entry is

(debit ) Retained earnings $2,700 -

(credit) Accumulated depreciation - $2,700