Chapter 11, Problem 11.11P

Requirement – 1

To determine

Errors:

An error is a mistake committed in the process of book-keeping or in accounting.  In some cases, errors may occur but, they will not affect the totals of the trial balance. Such an error can be found while preparing the trial balance or would be indicated by the unusual account balance.

Depreciation:

It refers to the reduction in the monetary value of fixed tangible assets over its useful life due to its wear and tear or, obsolescence. In other words, it is the method of distributing the cost of tangible fixed assets over its estimated useful life.

To prepare: The appropriate correcting entry for the equipment capitalization error discovered in 2016.

Explanation of Solution

The appropriate correcting journal entries for the equipment are as follows:

Purchase of equipment

Purchase of equipment made in the year 2014
Correct entry			Incorrect entry
Accounts title and explanation	Debit ($)	Credit ($)	Accounts title and explanation	Debit ($)	Credit ($)
Equipment	1,900,000		Equipment	2,000,000
Expense	100,000		Cash		2,000,000
Cash		2,000,000
(To record the purchase of equipment.)			(To record the purchase of equipment.)

Table (1)

Accumulated depreciation - 2014:

Depreciation  in the year 2014
Correct entry			Incorrect entry
Accounts title and explanation	Debit ($)	Credit ($)	Accounts title and explanation	Debit ($)	Credit ($)
Expense	475,000		Expense	500,000
Accumulated          depreciation		475,000	Accumulated         depreciation		500,000
(To record the depreciation.)			(To record the depreciation.)
Working note $\begin{array}{c}\text{Depreciation =}\left(\begin{array}{l}\text{Cost of equipment }\\ \times \text{Depreciation}\text{rate}\end{array}\right)\\ =\$1,900,000\times 25\%\\ =\$475,000\end{array}$			Working note $\begin{array}{c}\text{Depreciation =}\left(\begin{array}{l}\text{Cost of equipment }\\ \times \text{Depreciation}\text{rate}\end{array}\right)\\ =\$2,000,000\times 25\%\\ =\$500,000\end{array}$
Note: Depreciation is twice the straight-line rate of 12.5%.

Table (2)

Accumulated depreciation - 2015:

Depreciation  in the year 2015
Correct entry			Incorrect entry
Accounts title and explanation	Debit ($)	Credit ($)	Accounts title and explanation	Debit ($)	Credit ($)
Expense	356,250		Expense	375,000
Accumulated       depreciation		356,250	Accumulated         depreciation		375,000
(To record the depreciation.)			(To record the depreciation.)
Working note $\begin{array}{c}\text{Depreciation =}\left(\begin{array}{l}\left(\begin{array}{l}\text{Cost of equipment}\\ \text{– Accumulated}\\ \text{ depreciation}\left(\text{2016}\right)\end{array}\right)\\ \times \text{Depreciation}\text{rate}\end{array}\right)\\ =\left(\begin{array}{l}\left(\begin{array}{l}\$1,900,000\\ -\$475,000\end{array}\right)\\ \times 25\%\end{array}\right)\\ =\$356,250\end{array}$			Working note $\begin{array}{c}\text{Depreciation =}\left(\begin{array}{l}\left(\begin{array}{l}\text{Cost of equipment}\\ \text{– Accumulated}\\ \text{ depreciation}\left(\text{2016}\right)\end{array}\right)\\ \times \text{Depreciation}\text{rate}\end{array}\right)\\ =\left(\begin{array}{l}\left(\$2,000,000-\$500,000\right)\\ \times 25\%\end{array}\right)\\ =\$375,000\end{array}$
Note: Depreciation is twice the straight-line rate of 12.5%.

Table (3)

Correcting entry for equipment, and accumulated depreciation:

The following entry is prepared to correct the incorrect accounts.

Correct entry
Accounts title and explanation	Debit ($)	Credit ($)
Retained earnings	56,250
Accumulated depreciation (1)	43,750
Equipment		100,000
(To correct the incorrect accounts)

Table (4)

In the two-year period, the depreciation expense is overstated by $43,750 and the expenses are understated by the $100,000. Therefore, when both were compared, the net income and retained earnings is overstated by $56,250 $\left(\$100,000-\$43,750\right)$. The accumulated depreciation was overstated during the two-year period.

Working note:

Determine the amount overstated.

Particulars	Correct amount	Incorrect amount	Difference
Depreciation 2014	475,000	500,000	25,000
Depreciation 2015	356,250	375,000	18,750
Total			43,750

Table (5)

(1)

Requirement – 2

To determine

To prepare: The journal entry related to the change in deprecation method.

Explanation of Solution

Adjusted journal entry for depreciation expenses is as follows:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Depreciation Expense (2)	178,125
	Accumulated depreciation		178,125
	(To record the depreciation.)

Table (6)

• Depreciation expense decreases the stockholder’s equity. Therefore, debit the depreciation expense with $178,125. 
• Accumulated depreciation –Equipment is a contra asset. It decreases the value of asset account. Therefore, credit accumulated depreciation – Equipment with $178,125.

Working note:

Determine the amount of depreciation

The change in depreciation method accounts for change in the accounting estimate. The financial statements made previously are not revised. Presently, the company uses straight-line method. The un-depreciated cost at the time of the change must be depreciated and for the remaining life, straight-line method depreciation is used. All these changes must be recorded in the disclosure note. Therefore, the depreciation for 2018-2023 is determined as follows:

Particulars	Amount ($)
Asset’s cost	1,900,000
Less: Accumulated depreciation to date	(831,250)
Un-depreciated cost, January 1, 2016	1,068,750
Estimated residual value	(0)
Less: To be depreciated over remaining 6 years	1,068,750
Estimated remaining life (2016-2018)	$÷6\text{years}$
Annual straight- line depreciation 2018-2023	178,125

Table (7)

(2)

Conclusion

Therefore, the adjusted journal entry for depreciation expenses is recorded.