Chap020 (accounting) 66 - Learning Objective 20-06...

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61. In 2011, internal auditors discovered that Fay, Inc. had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2008. The machine's useful life was expected to be 5 years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of: A. $140,000. B. $280,000. C. $420,000. D. $700,000. During the three year period, depreciation expense was understated by $420,000, but other expenses were overstated by $700,000, so net income during the period was understated by $280,000, which means retained earnings is currently understated by that amount. During the three year period, accumulated depreciation was understated, and continues to be understated by $420,000. AACSB: Analytic Bloom's: Application
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Unformatted text preview: Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors; regardless of the type of error or the timing of its discovery. Level of Learning: Medium 62. An item that should be reported as a prior period adjustment is the: A. Correction of an error in depreciation from last year. B. Payment of taxes due to a tax audit of last year's tax return. C. Collection of a previously written off bad debt. D. Receipt of the proceeds of a note receivable that was due last year. AACSB: Reflective thinking Bloom's: Comprehension Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors; regardless of the type of error or the timing of its discovery. Level of Learning: Medium...
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