Question

In 2018, internal auditors discovered that Fay, Inc., had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2015. The machine's useful life was expected to be five years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:

Answer 1

Cost of a machine purchased on January 1, 2015 (Equipment) = $700,000

Accumulated depreciation:

= ($700,000 ÷ 5 years) ÷ 3 years

= $140,000 ÷ 3 years

= $420,000

Retained earnings = Cost of machine - Accumulated depreciation

= $700,000 - $420,000

= $280,000

Therefore, the journal entry is as follows:

Equipment A/c Dr. $700,000

To Accumulated depreciation $420,000

To Retained earnings $280,000

(To record the correct entry)