Question

1. Describe how a firm would correct each of the following errors, include both financial statement presentation and journal entries.
2. 1. On January 2, 2017, ABC company sold a piece of equipment costing $3,900 for $1,800. At the date of sale, the equipment had accumulated depreciation of $2,400. The company recorded the cash received as Miscellaneous Income in 2017. The company had not closed the books for 2018 when it discovered the error.
   2. The same fact set in except the firm had closed its books in 2018 when it discovered the error

Answer 1

a.

Wrong entry recorded

Cash $1,800

Miscellaneous Income $1,800

This entry is wrong because the equipment, its accumulated depreciation is still present in the financial statement. This should not be present. So Miscellaneous income should be reversed.

Correction entry:

Miscellaneous Income $1,800

Accumulated Depreciation $2,400

Equipment $3,900

Gain on sale of asset $300

b.

The accounts has already been closed, so we can only account in the next accounting year. Correction is done via retained earnings, because previous year income is charged to retained earnings.

Correction entry

Reatained Earnings $1,500

Accumulated Depreciation $2,400

Equipment $3,900