Question

Practice Exercise 8

At the end of 2019, while preparing its financial statements, Blossom Ltd. discovered an error in its accounting records. A truck with an original cost of $13,000, a service life of 4 years, and a residual value of $3,400 was expensed when it was purchased at the beginning of 2018. The company was subject to an income tax rate of 40%. Blossom used the straight-line method of depreciation for vehicles and follows ASPE.

Prepare the journal entries to correct the error and record depreciation for 2019.

Answer 1

Original cost 13,000 Useful life 4 years Residual value 3,400 Annual depreciation (Original cost-Residual value)/Useful life 2,400 Tax savings on the amount of above depreciation (40%*2400) 960 Net effect 1,440 Treatment done by the company Blossom Ltd. expensed the whole original cost of $13,000 in its statement of profit & loss for the year ended 31/12/2018, thus leading to the tax savings of $5200 (40%*13000) for the company and a net effect of $7800 decrease in the net profits of the year 2018. Therefore, the amount by which rectification entry would be passed in 2019 would be 7800-1440 = 6440 Now, the rectification entry in 2019 would be 6,440 Excess depreciation Retained earnings/Statement of profit or loss (Rectification of error in respect of excess depreciation in 2018) 6,440 2,400 Depreciation expense Accumulated depreciation (Recording of depreciation expense for 2019) 2,400