Question

In 2016, internal auditors discovered that Fay, Inc., had debited an expense account for the $700,000cost of a machine purchased on January 1, 2013. The machine’s useful life was expected to befive years with no residual value. Straight-line depreciation is used by Fay.

The journal entry tocorrect the error will include a credit to accumulated depreciation of:

a. $140,000.

b. $280,000.

c. $420,000.

d. $700,000

Answer 1

c. $420,000

Step-by-step explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset .

To record depreciation, debit depreciation expense and credit accumulated depreciation.

These are the entries that have been omitted between 2013 and 2016 (3 years)

Annual depreciation = $700,000/5 = $140,000

For 3 years, accumulated depreciation

= 3 * $140,000

= $420,000

This will be credited to accumulated depreciation.

Answer 2

c. $420,000

Step-by-step explanation:

The purchase date was 1 January 2013 and the machine was expensed out rather than being recorded as an asset.

So the depreciation and allowance for depreciation was not recorded for 3 years starting from Jan 2013-Dec 2015.

Annual Depreciation using straight line depreciation: $700,000 ÷ 5 = $140,000 per annum.

3 years allowance for depreciation = $140,000 × 3 = $420,000