Question

Panola Company purchased equipment on 1/1/2019 for 980,000. The equipment has a 10 year useful life, and is depreciated straight-line. The residual value at the end of 10 years is 150,000. At the end of 2021 (but before the books of 2021 were closed) the company's accountant discovered that when calculating annual depreciation for the last three years (2019,2020, and 2021) a residual value of 50,000 was used by error (instead of the correct residual value of 150,000). The journal entry in 2021 to correct this error should include the following (ignore tax effects):

a. Credit to RE 20,000

b. Debit to RE 100,000

c. Credit to RE 100,000

d. Debit to RE 20,000

Answer 1

Answer: a Credit to RE 20,000

Calculations:

Excess residual value [$150,000 - $50,000]	$100,000
÷ Estimated useful life	10 years
= Excess depreciation charged each year	$10,000
x 2 years [2019 & 2020]	2
= Excess depreciation charged over 2 years	$20,000

Rectification entry:

Date	Account title and explanation	Debit	Credit
Dec 31,2021	Accumulated depreciation	$20,000
	Retained earnings		$20,000
	[To rectify past excess depreciation charged]

Thus, Option A is correct and remaining options are incorrect.