(Depreciation and Error Analysis) A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2018, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2015 to 2018, inclusive. The following data were ascertained.

Balance of Trucks account, Jan. 1, 2015
Truck No. 1 purchased Jan. 1, 2012, cost	\(18,000
Truck No. 2 purchased July 1, 2012, cost	22,000
Truck No. 3 purchased Jan. 1, 2014, cost	30,000
Truck No. 4 purchased July 1, 2014, cost	24,000
Balance, Jan. 1, 2015	\)94,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2015, and entered in the ledger, had a balance on that date of \(30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2015.

Transactions between January 1, 2015, and December 31, 2018, which were recorded in the ledger, are as follows.

July 1, 2015 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was \)40,000. Ichiro. paid the automobile dealer \(22,000 cash on the transaction. The entry was a debit to Trucks and a credit to Cash, \)22,000. The transaction has commercial substance.

Jan. 1, 2016 Truck No. 1 was sold for \(3,500 cash; entry debited Cash and credited Trucks, \)3,500.

July 1, 2017 A new truck (No. 6) was acquired for \(42,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2017 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for \)700 cash. Ichiro received \(2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, \)3,200, and credits to Miscellaneous Income, \(700, and Trucks, \)2,500.

Entries for straight-line depreciation had been made at the close of each year as follows: 2015, \(21,000; 2016, \)22,500; 2017, \(25,050; and 2018, \)30,400.

Instructions

1. For each of the 4 years, compute separately the increase or decrease in net income arising from the company’s errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
2. Prepare one compound journal entry as of December 31, 2018, for adjustment of the Trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2018.

Step by step solution

01

Meaning of Depreciation

Depreciation is an accounting practice of assigning the cost of tangible assets to expenses in a systematic and sensible manner to the periods in which the assets are expected to be used.

02

Computing the increase or decrease in net income

Date of purchase	Cost	Depreciation per year	Depreciation for 2012	Balance as on 31.12.2012	Depreciation for 2013	Balance as on 31.12.2013	Depreciation for 2014	Balance as on 31.12.2014	Accumulated depreciation as on 01.01.2015
	A	B	C	D	E	F	G	H	I=C+E+G
01-01-12	18,000	3,600	3,600	14,400	3,600	10,800	3,600	7,200	10,800
01-07-12	22,000	4,400	2,200	19,800	4,400	15,400	4,400	11,000	11,000
01-01-14	30,000	6,000	0		0	0	6,000	24,000	6,000
01-07-14	24,000	4,800	0		0	0	2,400	21,600	2,400
Total	94,000	18,800	5,800	34,200	8,000	26,200	16,400	63,800	30,200

Since no entry for depreciation charges were made in the years 2012, 2013, and 2014, higher revenue of $5,800, $8,000, and $16,400 were recorded in the income statement for the years 2012, 2013, and 2014.

In addition, in 2015, one combined item pertaining to depreciation from past years was approved, resulting in lower income in the income statement due to the recording of the previous year’s costs.

Preparing corrected schedule

Date of purchase	Cost	Depreciation per year	Depreciation for 2012	Balance as on 31.12.2012	Depreciation for 2013	Balance as on 31.12.2013	Depreciation for 2014	Balance as on 31.12.2014	Depreciation for 2015	Balance as on 31.12.2015	Depreciation for 2016	Balance as on 31.12.2016	Depreciation for 2017	Balance as on 31.12.2017	Depreciation for 2018	Balance as on 31.12.2018
	A	B	C	D	E	F	G	H	I	J	K	L	M	N	O	P
01-01-12	18,000	3,600	3,600	14,400	3,600	10,800	3,600	7,200	3,600	3,600	0	0	0	0	0	0
01-07-12	22,000	4,400	2,200	19,800	4,400	15,400	4,400	11,000	4,400	6,600	4,400	2,200	2,200	0	0	0
01-01-14	30,000	6,000	0	0	0	0	6,000	24,000	6,000	18,000	6,000	12,000	6,000	6,000	6,000	0
01-07-14	24,000	4,800	0	0	0	0	2,400	21,600	4,800	16,8000	4,8000	12,000	4,800	7,200	4,800	2,400
01-07-15	40,000	8,000	0	0	0	0	0	0	4,000	36,000	8,000	28,000	8,000	20,000	8,000	12,000
01-07-17	42,000	8,400	0	0	0	0	0	0	0	0	0	0	4,200	37,800	8,400	29,400
Total	176,000	35,200	5,800	34,200	8,000	26,200	16,400	63,800	22,800	81,000	23,200	54,200	25,200	71,000	27,200	43,800
						Entries passed for depreciation			21,000		22,500
						Difference			18,000		700

03

Preparing journal entry

Compound journal entry in December 2018

Date	Particulars	Debit ($)	Credit ($)
Dec.31, 2018	Accumulated Depreciation-Trucks	66,550
	Trucks		48,000
	Retained Earnings		4,550
	Depreciation Expense		14,000

Working notes:

Summary of adjustment

	Per Books	As Adjusted	Adjustment Dr. or (Cr.)
Trucks	$152,000	$104,000	$(48,000)
Accumulated Depreciation	$129,150	$62,600	$ 66,550
Prior Years’ Income
Retained Earnings, 2015	$21,000	$22,800	$ 1,800
Retained Earnings, 2016	22,500	17,300	(5,200)
Retained Earnings, 2017	24,350	23,200	1,150
Totals	$67,850	$63,300	$(4,550)
Depreciation Expense, 2018	$30,400	$16,400	$(14,000)

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