During your audit examination of the Shirley Company's Plant, Property, and Equipment accounts, the following transaction came
Question:
During your audit examination of the Shirley Company's Plant, Property, and Equipment accounts, the following transaction came to your attention. On January 2, 1998, machine A was exchanged for machine B. Shirley Company acquired machine A for \(\$ 90,000\) on January 2, 1996. Machine A had an estimated useful life of four years and no salvage value, and the machine was depreciated on the straight-line basis. Machine B had a cash price of \(\$ 108,000\). In addition to machine A, cash of \(\$ 30,000\) was given up in the exchange. Machine B has an estimated useful life of five years and no salvage value, and the machine is being depreciated using the straight-line method. Upon further analysis, you discovered that the company recorded the transaction as an exchange of dissimilar assets instead of an exchange of similar assets. You must now determine the following:
a. What journal entry did the Shirley Company make when it recorded the exchange of machines? (Show computations.)
b. What journal entry should the Shirley Company have made to record the exchange of machines?
c. Assume the error was discovered on December 31, 1999, before adjusting journal entries have been made. What journal entries should be made to correct the accounting records? (Adjustments of prior years' net income because of errors should be debited or credited to Retained Earnings.) What adjusting journal entry should be made to record depreciation for 1999? (Ignore income taxes.)
d. What effect did the error have on reported net income for 1998 ? (Ignore income taxes.)
e. How should machine B be reported on the December 31, 1999, balance sheet?
Step by Step Answer:
Financial Accounting A Business Perspective
ISBN: 9780072289985
7th Edition
Authors: Roger H. Hermanson, James Don Edwards