Equipment was bought by a company on January 1, Year One, for $40,000. It had an
ID: 2598506 • Letter: E
Question
Equipment was bought by a company on January 1, Year One, for $40,000. It had an expected useful life of five years and a $5,000 residual value. Unfortunately, at the time of purchase, an error was made. The accountant debited supplies expense for $40,000 and credited cash. No adjusting entry was ever made. At the end of Year One, the company reported net income of $100,000 and total assets of $300,000. What should those reported figures have been under each of the following situations? a. The company uses the straight-line method to depreciate all equipment. b. The company uses the double-declining balance method to depreciate all equipment.
Explanation / Answer
Requirement a: Straight line method: A Net Income 100000 Add: Supplies Expense 40000 Adjusted Net Income 100000+40000 140000 Less: Depreciation (40000-5000)/5 7000 Adjusted Net Income at the end of Year 1 140000-7000 133000 B Total Assets 300000 Add: Equipment 40000 340000 Less: Depreciation 7000 Adjusted Total Assets at the end of year 1 340000-7000 333000 Requirement b: Double Declining Balance method: A Net Income 100000 Add: Supplies Expense 40000 Adjusted Net Income 100000+40000 140000 Less: Depreciation 40000*(1/5)200% 16000 Adjusted Net Income at the end of Year 1 140000-16000 124000 B Total Assets 300000 Add: Equipment 40000 340000 Less: Depreciation 16000 Adjusted Total Assets at the end of year 1 340000-16000 324000
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