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Chapter 22: 22-6BE (page 1307)

In 2017, Bailey Corporation discovered that equipment purchased on January 1, 2015, for $50,000 was expensed at that time. The equipment should have been depreciated over 5 years, with no salvage value. The effective tax rate is 30%. Prepare Bailey鈥檚 2017 journal entry to correct the error. Bailey uses straight-line depreciation

Short Answer

Expert verified

Equipment is debited by $50,000, accumulated depreciation is credited by $20,000, deferred tax liability is credited by $9,000, and retained earnings is credited by $21,000.

Step by step solution

01

Calculation of accumulated depreciation

Accumulateddepreciation=DepreciationExpense脳2=50,0005脳2=$20,000DeferredTaxLiability=RemainngValue脳TaxRate=(50,000-20,000)脳30%=$9,000

02

Journal Entry

Date

Particulars

Debit ($)

Credit ($)

Equipment

50,000

Accumulated depreciation- Equipment

20,000

Deferred Tax Liability

9,000

Retained Earnings

21,000

(Being the correction entry is recorded)

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Most popular questions from this chapter

Discuss briefly the three approaches that have been suggested for reporting changes in accounting principles.

How might differences in presentation of comparative data under GAAP and IFRS affect adoption of IFRS by U.S. companies?

Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information.

Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2012 \(100,000 \) 90,000 $100,000 2013 70,000 65,000 160,000 2014 90,000 80,000 235,000 2015 120,000 130,000 340,000 2016 300,000 290,000 590,000 2017 305,000 310,000 780,000

Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?

(b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017?

(c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018?

(d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015?

Palmer Co. is evaluating the appropriate accounting for the following items. 1. Management has decided to switch from the FIFO inventory valuation method to the LIFO inventory valuation method for all inventories. 2. When the year-end physical inventory adjustment was made for the current year, the controller discovered that the prior year鈥檚 physical inventory sheets for an entire warehouse were mislaid and excluded from last year鈥檚 count. 3. Palmer鈥檚 Custom Division manufactures large-scale, custom-designed machinery on a contract basis. Management decided to switch from the completed-contract method to the percentage-of-completion method of accounting for longterm contracts. Identify and explain whether each of the above items is a change in accounting principle, a change in estimate, or an error

IFRS requires companies to use which method for reporting changes in accounting policies?

(a) Cumulative effect approach.

(b) Retrospective approach.

(c) Prospective approach.

(d) Averaging approach.
See all solutions

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