[LD]

Let’s say there is an error in how a company calculates depreciation. In year 2, a company buys equipment for $10,000 and expenses all of it instead of depreciating on a straight line basis over 4 years. In year 3, they correct the error. What are the journal entries for year 3?

[Eugenio]

Based on the information you provided(cost of equipment $10,000/4 year straight-line-depreciation)
Depreciation expense should have been $2,500 a year, recording a journal entry each year as follows:
DR: Depreciation expense:$2,500
CR: Accumulated depreciation: $2,500
Assuming that the equipment was bought Jan 1 Year 2 and the correction was made Dec 31, Year 3 the correcting Journal entries would be:
DR: Accumulated depreciation $5,000
CR: Retained Earnings: $5,000

Since the depreciation expense was overstated in Year 2, which means Net Income was understated, which means Retained Earnings was understated, you must “add back” $5,000($2,500 year 2, $2,500 year 3) to Retained Earnings. Accumulated depreciation is the balancing account so that the equipment can be stated at its correct carrying value on the balance sheet.

[fsugirl2005]

@Eugenio Your answer is incorrect. The question says the equipment was expensed which means it should have been capitalized and then depreciated.

The journal entry would be:

DR Equipment 10,000
CR Retained Earnings 10,000

DR Retained Earnings $5000
CR Accumulated Depreciation $5000

AUD - 10/21/16 (75----07/2010 expired)
FAR - 10/28/16
BEC - 11/2016
REG - 01/2017

Using Gleim CPA Review, Ninja Audio, Ninja Book

[Eugenio]

Read the question again and you are correct!
Must improve my reading comprehension.

Thank you for the clarifying!

[DS]

If the error is corrected in year 3, you should only make an entry that deals with year 2. Otherwise you are understating depreciation expense for year 3. I think you need the following two entries.

Correct the error at some point in year 3:

DR Equipment                  10,000
CR Accumulated Depreciation           2,500
CR Retained Earnings                  7,500

Record depreciation expense at the end of year 3:

DR Depreciation Expense        2,500
CR Accumulated Depreciation          2,500

[fsugirl2005]

@DS You are absolutely correct. Looks like @Eugenio and I both read the question incorrect in some way. I thought the equipment was purchased in Year 1 but it says Year 2. Normally, I see things like that but oh well..lol.

AUD - 10/21/16 (75----07/2010 expired)
FAR - 10/28/16
BEC - 11/2016
REG - 01/2017

Using Gleim CPA Review, Ninja Audio, Ninja Book

[Author]

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