Question

In 2021, internal auditors discovered that PKE Displays, Inc. had debited an expense account for the $369,000 cost of equipment purchased on January 1, 2018. The equipment's life was expected to be five years with no residual value. Straight-line depreciation is used by PKE Required: 1. Determine the cumulative effect of the error on net income over the three-year period from 2018 through 2020, and on retained earnings by the end of 2020. 2. Prepare the correcting entry assuming the error was discovered in 2021 before the adjusting and closing entries. (Ignore income taxes.) 3. Assume instead that the equipment was disposed of in 2022 and the original error was discovered in 2023 after the 2022 financial statements were issued. Prepare the correcting entry in 2023. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Determine the cumulative effect of the error on net income over the three-year period from 2018 through 2020, and on retained earnings by the end of 2020 Net income over the period 2018 through 2020 is understated by by 369,000 147,600 $ Retained earnings by the end of 2020 is understated Required 1 Required 2

Answer 1

Date : -- . Q. If awet is recognised as expense it means whole amount is claimed in same year. The correct treatment is Depreciation should be charged each year cont of Eg. 369 ou Lefe Sys Debreciation fia3690 7 3,800 1. = In 2018, whole amount of $3 69,000 is de bited but amount that should be debited is $ 73,60o so net income is understated by = 369.000- 73,800 -$295,200 In 2019, the amount of depreciation is not changed becaux of eyror in 2018 so in this year Net Income is onestated by 73, 6oo. In 2020, the same amount as in dolg ů owerstated by 73,800 so Net income one the period through 2018 to 2020 I s understated by $147 600 (295200-73800 -73 800) Retained earning by the end of 2000 is understated by $ 147600 Equipment Al - Debit Retained farling - cxdit 147,600 141650 3) No entory is figured to be passed 04 Vals o esgui poest would become more Indodhl u k was completed 1 @gmpmart was told than the Amewat medved å to be Coedited as Income Binky I No need to increax Retalned earning because in 5 year, the whole cost would be written off it I ho error occurred.