In each of the following situations, determine if the appropriate action was tak

Question

In each of the following situations, determine if the appropriate action was taken. If not, describe the financial statement impact of the error. A. Recorded the $50,000 purchase of land acquired for investment purposes as a debit to the Land account. B. A $450 tune-up to the delivery truck was capitalized to the Truck account. C. Land to be used as the site for a new warehouse was purchased for $250,000 plus a broker’s commission of $12,500. The Land account was debited for $250,000, and the $12,500 broker’s commission was recorded as commission expense. D. The $650 cost to install a new water heater was charged to plumbing repairs expense. E. A patent was purchased for $475,000 and recorded in the Equipment account. F. Depletion relating to the extraction of 200,000 barrels of oil was not recorded because the oil is still sitting in inventory and has not been sold.

Explanation / Answer

A.) No Correction needed.

B.)  No Correction needed.

C.) Broker commision will not be separately recorded as commission expense in statement of profit and loss.   It will form part of cost of asset and therefore capitalized. Total amount of land to be shown in Balance sheet = 250000 + 12500 = 262500. The following rectifying entry should be passed to eliminate the broker’s commission being recorded as commission expense.

Land A/c Dr.

To Commission Expenses

12500

12500

D.) Cost to install a new water heater will form part of cost of new water heater and therefore, capitalized. It had been wrongly charged to plumbing repairs expense which will be now rectified by way of following journal entry.

Water Heater A/c Dr.

To Plumbing repairs expenses

650

650

E.) Patent will be treated as a separate asset. It had been wrongly recorded in Equipment account, which will be rectified by way of following journal entry.

Patent A/c Dr.

To Equipment A/c

475000

475000

F.) Depletion relating to the extraction of 200,000 barrels of oil will be recognized by way of following journal entry.

Depletion A/c Dr.

To Mineral Ore A/c

Land A/c Dr.

To Commission Expenses

12500

12500

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