Question

Knowledge Check 01 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)

Answer 1

Answer:

The amount of the credit to retained earnings is $1,935,000.

Explanation:

Cost of the machine = $2,580,000

Machine's useful life = 12

Annual depreciation expenses = Cost of the machine / Machine's useful life = $2,580,000 / 12 = $215,000

Since the error is discovered during year 4 (after 3 years), this implies that we have to calculate total depreciation expenses for 3 years first as follows:

Total depreciation expenses for 3 years = Annual depreciation expenses * 3 = $215,000 * 3 = $645,000

The amount of the credit to retained earnings can now be calculated as follows:

Amount of the credit to retained earnings = Cost of the machine - Total depreciation expenses for 3 years = $2,580,000 - $645,000 = $1,935,000

Therefore, the amount of the credit to retained earnings is $1,935,000.