In 2018, after the 2017 financial statements were issued, internal auditors disc
ID: 2565985 • Letter: I
Question
In 2018, after the 2017 financial statements were issued, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $350,000 cost of a machine purchased on January 1, 2013. The machine’s useful life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.
Ignoring income taxes, prepare the journal entry PKE will use to correct the error. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
In 2018, after the 2017 financial statements were issued, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $350,000 cost of a machine purchased on January 1, 2013. The machine’s useful life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.
Explanation / Answer
No correcting entry would be required, since all the accounts will be showing appropriate balances.
This is because,
The machine is to be depreciated on straight line basis from 2013 @$70,000 per year and the cost of $350,000 would have been fully depreciated in 5 year i.e by december 31,2017.
Which means that all the related balances of retained earnings of entity will now be unaffected due to the error.
Had this error been recognised in any of the earlier years appropriate adustments should have been made to the retained earnings , accumulated depreciation and machinery account. The amount of adjustment depends on the year in which the error is recognised.
But in this case, since the life of the machinery has expired, no entry is required.