Gibbs Inc. purchased a machine on January 1, 2014, at a cost of $60,000. The machine is expected to have an estimated residual value of $5,000 at the end of its five-year useful life. The company capitalized the machine and depreciated it in 2014 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment as this method best reflects the benefits to the company over the life of its machinery. However, the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2014, was $53,000 as a result of depreciating the machine incorrectly. Gibbs has not closed its books for 2014yet.
Instructions
(a) Using the method of depreciation that the company normally follows, prepare the correcting entry and determine the corrected net income. Assume the books of account have not yet been closed for 2014, and ignore income taxes.
(b) Discuss the impact on a potential investor if the error was not detected and corrected by Gibbs.