Gibbs Inc. purchased a machine on January 1, 2017, 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 2017 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, 2017, was $53,000 as a result of depreciating the machine incorrectly. Gibbs has not closed its books for 2017 yet. Gibbs uses IFRS to prepare its financial statements.
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 2017, and ignore income taxes.
(b) Repeat part (a) assuming Gibbs uses ASPE instead of IFRS, the salvage value is $3,000, and the machinery has a physical life of six years.
(c) Discuss the impact on a potential investor if the error is not detected and corrected by Gibbs.