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Chapter 22: 22-21Q (page 1306)

Equipment was purchased on January 2, 2017, for $24,000, but no portion of the cost has been charged to depreciation. The corporation wishes to use the straight-line method for these assets, which have been estimated to have a life of 10 years and no salvage value. What effect does this error have on net income in 2017? What entry is necessary to correct for this error, assuming that the books are not closed for 2017?

Short Answer

Expert verified

Depreciation expense is debited by $2,400, and accumulated depreciation is credited by $2,400. Income was overstated by the amount of $2,400

Step by step solution

01

Calculation of depreciation expense

$D e p r e c i a t i o n e x p e n s e = \frac{C o s t}{E s t i m a t e d l i f e} = \frac{24, 000}{10} = $ 2, 400$

Income was overstated by $2,400.

02

Journal Entry

Date	Particulars	Debit ($)	Credit ($)
	Depreciation expense	2,400
	Accumulated depreciation		2,400
	Being correcting entry

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Most popular questions from this chapter

Aston Corporation performs year-end planning in November of each year before its calendar year ends in December. The preliminary estimated net income is $3 m i l l i o n . T h e C F O, R i t a W a r r e n, m e e t s w i t h t h e c o m p a n y p r e s i d e n t, J . B . A s t o n, t o r e v i e w t h e p r o j e c t e d n u m b e r s . S h e p r e s e n t s t h e f o l l o w i n g p r o j e c t e d i n f o r m a t i o n . A S T O N C O R P O R A T I O N P R O J E C T E D I N C O M E S T A T E M E N T F O R T H E Y E A R E N D E D D E C E M B E R 31, 2017 S a l e s$ 28,995,000 Interest revenue 5,000 Cost of goods sold $14, 000, 000 D e p r e c i a t i o n 2, 600, 000 O p e r a t i n g e x p e n s e s 6, 400, 00023, 000, 000 I n c o m e b e f o r e i n c o m e t a x 6, 000, 000 I n c o m e t a x 3, 000, 000 N e t i n c o m e$ 3,000,000 ASTON CORPORATION SELECTED BALANCE SHEET INFORMATION AT DECEMBER 31, 2017 Estimated cash balance $5, 000, 000 A v a i l a b l e - f o r - s a l e d e b t i n v e s t m e n t s (a t c o s t) 10, 000, 000 F a i r v a l u e a d j u s t m e n t (1 / 1 / 17) — 0 — E s t i m a t e d f a i r v a l u e a t D e c e m b e r 31, 2017 : S e c u r i t y C o s t E s t i m a t e d F a i r V a l u e A$ 2,000,000 $2, 200, 000 B 4, 000, 0003, 900, 000 C 3, 000, 0003, 100, 000 D 1, 000, 0001, 800, 000 T o t a l$ 10,000,000 $11, 000, 000 O t h e r i n f o r m a t i o n a t D e c e m b e r 31, 2017 : E q u i p m e n t$ 3,000,000 Accumulated depreciation (5-year SL) 1,200,000 New robotic equipment (purchased 1/1/17) 5,000,000 Accumulated depreciation (5-year DDB) 2,000,000 The corporation has never used robotic equipment before, and Warren assumed an accelerated method because of the rapidly changing technology in robotic equipment. The company normally uses straight-line depreciation for production equipment. Aston explains to Warren that it is important for the corporation to show a $7, 000, 000 i n c o m e b e f o r e t a x e s b e c a u s e A s t o n r e c e i v e s a$ 1,000,000 bonus if the income before taxes and bonus reaches $7, 000, 000. A s t o n a l s o d o e s n o t w a n t t h e c o m p a n y t o p a y m o r e t h a n$ 3,000,000 in income taxes to the government.

Instructions (a) What can Warren do within GAAP to accommodate the president’s wishes to achieve $7,000,000 in income before taxes and bonus? Present the revised income statement based on your decision. (b) Are the actions ethical? Who are the stakeholders in this decision, and what effect do Warren’s actions have on their interests?

Distinguish between counterbalancing and noncounterbalancing errors. Give an example of each.

If a company registered with the SEC justifies a change in accounting method as preferable under the circumstances, and the circumstances change, can that company switch back to its prior method of accounting before the change? Why or why not?

How might differences in presentation of comparative data under GAAP and IFRS affect adoption of IFRS by U.S. companies?

You have been engaged to review the financial statements of Gottschalk Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows.

1. Year-end wages payable of \(3,400 were not recorded because the bookkeeper thought that “they were immaterial.”

2. Accrued vacation pay for the year of \)31,100 was not recorded because the bookkeeper “never heard that you had to do it.”

3. Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $2, 640 b e c a u s e “ t h e a m o u n t o f t h e c h e c k i s a b o u t t h e s a m e e v e r y y e a r . ” 4. R e p o r t e d s a l e s r e v e n u e f o r t h e y e a r i s$ 2,120,000. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense account is $103,400.

Instructions Prepare the necessary correcting entries, assuming that Gottschalk uses a calendar-year basis.

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