Question

In 2021, management discovered that Dietlikon Production had debited expense for the full cost of an asset purchased on January 1, 2018, at a cost of $36 million with no expected residual value. Its useful life was 5 years. Dietlikon uses straight-line depreciation. The correcting entry, assuming the error was discovered in 2021 before preparation of the adjusting and closing entries, includes (ignore taxes):
a. A debit to accumulated depreciation of $14.4 million.
b. A credit to accumulated depreciation of $21.6 million.
c. A credit to an asset of $36 million.
d. A debit to retained earnings of $14.4 million.

Answer 1

Answer:

The correct answer is Option B.

Explanation:

Under straight-line method, depreciation expense is (cost - residual value) / No of years = ($36,000,000 - $0) / 5 years = $7,200,000 yearly depreciation expense.

Accumulated depreciation expense by straight-line in 2021 will be (3 years):  $7,200,000 x 3 years = $21,600,000.

The correcting journal entries will be:

Debit Fixed asset cost $36,000,000

Credit Operating expense $36,000,000

(Reversal of wrong posting)

Debit Depreciation expense $21,600,000

Credit Accumulated depreciation $21,600,000

(Being depreciation charge for 3 years)