Question

Cricket Corporation recorded the material purchase of $1 million of equipment with the following journal entry:

                                         Equipment Expense                              1,000,000

                                              Cash                                                         1,000,000

After the books are closed, what is the proper journal entry to correct the mistake when discovered in the subsequent year? Ignore the impact on depreciation in either year.

Group of answer choices

Either of these entries would result in corrected account balances.

Dr Cash 1,000,000 and Cr Equipment Expense

Dr Equipment 1,000,000 and Cr Retained Earnings 1,000,000

Neither of these entries would result in corrected account balances.

Answer 1

Equipment of 1,000,000 was purchased but instead of debiting equipment by 1,000,000 equipment expense was debited by 1,000,000.

Thus, to correct the error made, equipment should be debited by 1,000,000 and retained earnings should be credited by 1,000,000.

Due to equipment expense in the year of purchase, retained earnings was under stated by 1,000,000 and thus to correct the error, retained earnings should be credited.

Third option is correct.

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