A depreciation schedule for heavy equipment of Beniluz Road Construction Company
ID: 2458795 • Letter: A
Question
A depreciation schedule for heavy equipment of Beniluz Road Construction Company was requested by your auditor soon after December 31, 2015, showing the addi- tions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2012 to 2015, inclusive. The following data were ascertained.
Balance of Equipment account, Jan. 1, 2012
Equipment No. 1 purchased Jan. 1, 2009, cost: $ 50,000
Equipment No. 2 purchased July 1, 2009, cost: 60,000
Equipment No. 3 purchased Jan. 1, 2010, cost: 55,000
Equipment No. 4 purchased July 1, 2011, cost : 70,000
Balance, Jan. 1, 2012 $235,000
The Accumulated Depreciation—Equipment account previously adjusted to January 1, 2012, and en- tered in the ledger, had a balance on that date of $89,000 (depreciation on the four pieces of equipment from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2012.
Transactions between January 1, 2012, and December 31, 2015, which were recorded in the ledger, are as follows.
Jan 1. 2013 -- Equipment No. 1 was sold for $6,000 cash; entry debited Cash and credited Equipments, $6,000.
July 1 2013- Equipment No. 2 was traded for a larger one (No. 5), the agreed purchase price of which was $80,000. Beniluz Road Construction Co. paid the dealer $66,000 cash on the transaction. The entry was a debit to Equipment and a credit to Cash, $66,000. The transaction has commercial substance.
July 1 2014-- Equipment No. 3 was damaged in a wreck to such an extent that it was sold as junk for $500 cash. Beniluz Road Construction Co. received $12,000 from the insurance company. The entry made by the bookkeeper was a debit to Cash, $12,500, and credits to Miscellaneous Income, $500, and Equipment, $12,000.
July 1 2015-- A new Equipment (No. 6) was acquired for $92,000 cash and was charged at that amount to the Equipments account.
Entries for depreciation had been made at the close of each year as follows: 2012, $47,000; 2013, $42,600; 2014, $32,700; 2015, $35,400.
Instructions
(a) For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting equipment, ignoring income tax considerations.
Explanation / Answer
Calculation for 2012
Depreciation calculation for 2012:
Equipment 1: 10000
Equipment 2: 12000
Equipment 3: 11000
Equipment 4: 14000
Total Dep for 2012: 47000
Depreciation actually charged 47000
So for 2012 there is no Error in recording of Depreciation
Calculation for 2013
Accumulated Dep Account Debit: 40000
Cash Account Debit: 6000
Profit/Loss Account(Loss on sale) credit 4000
To Equipment Account credit 50000
Accumulated Dep Account Debit(Equipment 2: 60000*4/5) : 48000
Equipment(5) Account Debit: 80000
To Profit/Loss Account(Profit on sale) credit 2000
To Equipment(2) Account credit 60000
To Cash Account 66000
Equipment 1: Nil
Equipment 2: for six months : 6000
Equipment 3: 11000
Equipment 4: 14000
Equipment 5: for six month: 8000
Total Dep for 2013 to be charged to P/L: 39000
Net Total depreciation and loss to be charged to P/L (39000 + 2000)= 41000
Depreciation actually charged 42600
So net additional amount which was charged to Profit and loss account for 2013 : 1600
Calculation for 2014
However entry should be
Cash Account Debit: 12500
Accumulated Depreciation Debit 49500
To Profit/Loss Credit (Gain on equipment) 7000
To Equipment credit(3) 55000
Equipment 1: Nil
Equipment 2: Nil
Equipment 3: 5500
Equipment 4: 14000
Equipment 5: 16000
Total Dep for 2013 to be charged to P/L: 35500
Profit to be booked 7000 from above entry.
So Total to be charged to P/L= 35500-7000= 28500
So Total actually charged from P/l= 32700-500= 32200
So the amount overcharged from Profit and loss for 2014: 32200-28500 = 3700
Calculation for 2015
Depreciation for 2015
Equipment 1: Nil
Equipment 2: Nil
Equipment 3: Nil
Equipment 4: 14000
Equipment 5: 16000
Equipment 6: 92000*0.5/5 = 9200
Total depreciation to be charged : 39200
Depreciation actually charged: 35400
So net amount which is not charged or shortfall depreciation which was not charged : 39200-35400= 3800
So answer is Summarizing below:
1)For 2012 there is no Error in recording of Depreciation and Profit and loss is correctly stated.
2)For 2013 the amount which was overcharged from Profit : 1600
3)For 2014 the amount overcharged from Profit = 3700
4)For 2015: The amount undercharged from Proft: 3800
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