Accounting changes and error corrections Flashcards
Cougar purchased a tractor on March 1, Year 3, for $240,000, and the estimated useful life was 5 years. Cougar recorded $48,000 for depreciation expense in Year 3. Record the entry upon discovery of the error in Year 4. Assume that Cougar records depreciation expense monthly.
Journal entry:
Accumulated depreciation
DR $8,000
Retained earnings
CR $8,000
The annual depreciation of the tractor is $48,000 ($240,000 ÷ 5 years). As of December 31, Year 3, the tractor had been depreciated for 10 months. Depreciation recorded should have been $40,000 [$48,000 × (10/12)] for Year 3.
Overstating the depreciation expense understates the retained earnings and overstates the accumulated depreciation of the tractor in Year 3. Therefore, the carrying amount of the accumulated depreciation should be debited for $8,000 and that of the retained earnings should be credited for the same amount when the error is discovered.
Cougar purchased a snowmobile on October 1, Year 3, for $19,000, with a $1,000 salvage value, and the estimated useful life was 3 years. Due to an oversight, the company failed to record depreciation expense in Years 3 and 4. Record the entry needed on June 30, Year 4, when the oversight was discovered. Assume that Cougar records depreciation expense monthly
Journal entry:
Retained earnings
$1,500
Depreciation expense
3,000
Accumulated depreciation
$4,500
The annual depreciation of the snowmobile should be $6,000 [($19,000 – $1,000) ÷ 3 years]. As of December 31, Year 3, the snowmobile should be depreciated for 3 months, and depreciation expense of $1,500 [$6,000 × (3/12)] should have been recognized. Since no depreciation was recorded in Year 3, the cumulative effect of the error on Year 3 is $1,500.
Failure to record depreciation expense in Year 3 results in overstating the carrying amount of retained earnings and understating the accumulated depreciation in Year 3. To correct the error, the retained earnings should be debited and the accumulated depreciation should be credited for $3,000. In addition, depreciation expense for the half-year ended June 30, Year 4, of $3,000 [$6,000 × (6/12)] should be recorded. Thus, the following journal entry is recorded on June 30, Year 4:
