Question

In 2021, it was discovered that Hines 55 had debited expense for the full cost of an asset purchased on January 1, 2018. The cost was $24 million with no expected residual value. Its useful life was 5 years and straight-line depreciation is used by the company. The correcting entry assuming the error was discovered in 2021 before the adjusting and closing entries includes:a.A credit to accumulated depreciation of $14.4 millionb.A debit to accumulated depreciation of $9.6 millionc.A debit to retained earnings of $9.6 milliond.A credit to an asset of $24 million

Answer 1

Answer:

A) A credit to accumulated depreciation of $14.4 Million

Explanation:

The complete journal entry should be:

• Dr Asset XXX account 24,000,000
• Cr Accumulated Depreciation account 14,400,000
• Cr Retained Earnings account 9,600,000

First of all the asset must be recorded at full value.

Accumulated depreciation would be credited for 3 years = ($24 / 5) x 3 = $4.8 x = $14.4

Since the depreciation expense lowered the net profits during 2018, the retained earnings must be adjusted for the remaining value = $24 - $14.4 = $9.8