The following information is available for Otto Corporation: Retained Earnings,

Question

The following information is available for Otto Corporation:

      Retained Earnings, December 31, 2018                                             $2,500,000

      Net Income for the year ended December 31, 2019                           $   450,000

The company accountant, in preparing financial statements for the year ending December 31, 2019, has discovered the following information:

The company's previous bookkeeper, who has been fired, had recorded depreciation expense on a machine in 2017 and 2018 using the double-declining-balance method of depreciation. The bookkeeper neglected to use the straight-line method of depreciation which is the company's policy. The cumulative effects of the error on prior years was $15,000, ignoring income taxes. Depreciation was computed by the straight-line method in 2019.

Instructions

(a)   Prepare the entry for the prior period adjustment.

(b)   Prepare the retained earnings statement for 2019.

Explanation / Answer

a) adjustment entry:

accumulated depriciation a/c dr. 15000

to profit and loss account 15000

note: assuming under double declining depriciation excess amount was charged in 2017 and 2018.

b).

retained earning

opening $2500000

adjustment for last years 15000

current year profit transfered. $450000

closing balance $2965000

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