Question

On January 1, Year 1, Burnham Company purchased a machine for $2,580,000; however, the cost of the machine was recorded as repairs expense. The machine's useful life was expected to be 12 years with no residual value. Burnham uses straight-line depreciation. What is the amount of the credit to retained earnings in the journal entry to correct the error if the error is discovered during year 4 (after 3 years)? Ignore income tax.

Answer 1

Answer:

Final amount to be credited in retained earnings in 4th year

$1,935,000

Explanation:

As for the information provided, we know

Cost of machine = $2,580,000

Life of machine = 12 years

That is depreciation for each year = $2,580,000/12 = $215,000

During the 4th year the error was discovered.

That means depreciation for 3 years = $215,000 $\times$ 3 = $645,000

Now, that the remaining amount wrongly charged to Income statement forming part of retained earnings shall be reversed.

= $2,580,000 - $645,000 = $1,935,000

The three year depreciation had to be provided, which is not provided actually, because entire asset was charged as an expense.

Therefore, final amount to be credited in retained earnings in 4th year

$1,935,000