Question

Sheridan Co. purchased machinery that cost $2650000 on January 4, 2019. The entire cost was recorded as an expense. The machinery has a 9-year life and a $165000 residual value. The error was discovered on December 20, 2021. Ignore income tax considerations. Sheridan's income statement for the year ended December 31, 2021, should show the cumulative effect of this error in the amount of:________

Answer 1

Answer:

See below

Explanation:

Recording the entire cost as expense would have understated retained earnings by $2,650,000

Annual depreciation on machine = ( Purchase cost - Residual value ) / Useful life

= ($2,650,000 - $165,000) / 9

= $2,485,000 / 9

= $276,111.11

Depreciation would have been recorded for $552,222 for 2 years had the machinery been corrected recorded I.e $276,111 × 2 = $552,222

Therefore , the cumulative effect of this error on the income statement of Sheridan for the year ended, 31 December 2021 would have shown

= $2,650,000 - $552,222

= $2,097,779