Kentucky Enterprises purchased a machine on January 2,2010, at a cost of $120,00
ID: 2389644 • Letter: K
Question
Kentucky Enterprises purchased a machine on January 2,2010, at a cost of $120,000. An additional $50,000 was spent for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life of five years and a salvage value of $20,000. As a result of the error,a. Retained earnings at December 21, 2011, was understated by $30,000 and 2011 income was overstated by $6,000.
B. retained earnings at December 31,2011, was understated by $38,000 and 2011 was overstated by $6,000.
c. retained earnings at December 31, 2011, was understated by $30,000 and 2011 income was overstated by $10,000.
d. 2010 income was understated by $50,000.
Explanation / Answer
The installation charge should have been charged to the cost of the machine instead as repair expenses. If the installation is treated correctly, the cost of machine should have been 120000 + 50000 = $170000 Depreciation charge for the year should have been (170000-20000)/5 = $3000 Incorrect depreciation charge for the year = (120000 - 20000)/5 = $20000 In 2010, there has also been an excess charging of expenses of 50000, and underestimate of depreciation for 1 year ($10000) Thus, underestimation of income = 50000 -10000 = $40000 In 2011, there will be another year of underestimation of depreciation of $10,000. As a result, overestimation of income = $10000 Thus, (C) is the correct answer. Hope this helps!
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