Question

In December 20X8, just before the financial statements were finalized, James & Jones discovered that a programming error in the calculation of depreciation of specialized, expensive machinery has caused the annual depreciation charge to be erroneously calculated. The error started from the date the machinery was purchased on January 1. 2012. The error resulted in a lower depreciation of $120,000 per year. Due to a large dividend payment in the previous year, J& J 's total equity balance stands at $1,200,000 at the end of 20X. Requirement: In your opinion, is this error material or not material? Why?

Answer 1

The error in the calculation of depreciation is material because it has a significant impact on the financial statements over several years.

Step-by-step explanation:

In my opinion, this error is material. Materiality refers to the importance of an error or omission in financial statements, especially in terms of its impact on the financial position and decisions of users of those statements.

In this case, the error in the calculation of depreciation has led to a lower depreciation charge of $120,000 per year. This means that the expenses related to the machinery are understated by $120,000 each year, resulting in higher reported profits and retained earnings.

Since the error has been ongoing since the date of purchase in 2012, the impact has accumulated over several years and could have a significant effect on the financial statements. Considering that J&J's total equity balance is $1,200,000, the impact of a $120,000 annual error is substantial and could mislead users of the financial statements.