Question

Delta bought equipment on 1/1/15 at a cost of $525. The equipment has a useful life of 7 years and no salvage value. The full cost of the equipment was mistakenly expensed immediately as repairs and maintenance expense.

a) Assume the error was discovered on 1/1/17. Because of the error, is net income for 2015 correct or incorrect (if incorrect, is it too high or too low and by what amount?)
b) Assume the error was discovered on 1/1/17. Because of the error, is net income for 2016 correct or incorrect (if incorrect, is it too high or too low and by what amount?)
c) Now assume, instead, that the error was caught on 1/1/18. Because of the error, are total assets on 1/1/18 correct or incorrect? (if incorrect, are they too high or too low and by what amount?)
d) Now assume that the error is not discovered until 1/1/24, are R.E. and total assets correct or incorrect on 1/1/24? (if incorrect, are they too high or too low and by what amount?)

Answer 1

Delta

a) Error discovered on 1/1/17: Net income for 2015 is incorrect. The net income is too low by $525

b) Error discovered on 1/1/17: Net income for 2016 is incorrect. The net income is too high by $75.

c) Error discovered on 1/1/18: Total assets for 1/1/18 are incorrect. The assets are too low by $300 ($525 - $225)

d) Error discovered on 1/1/24: Retained earnings and total assets are correct.

Step-by-step explanation:

a) Data and Analysis:

Cost of equipment on 1/1/15 = $525

Estimated useful life = 7 years

Salvage value = $0

Cost of equipment recorded as Repairs and Maintenance Expense