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In year 4, internal auditors discovered that Cistern Displays, Inc., had debited an expense account for the $400,000 cost of equipment purchased on January 1,
In year 4, internal auditors discovered that Cistern Displays, Inc., had debited an expense account for the $400,000 cost of equipment purchased on January 1, year 1. The equipment's life was expected to be five years with no residual value. Straight-line depreciation is used by Cistern. Required: 1. Determine the cumulative effect of the error on net income over the three-year period from year 1 through year 3, and on retained earnings by the end of year 3. 2. Prepare the correcting entry assuming the error was discovered in year 4 before the adjusting and closing entries. (Ignore income taxes.) 3. Assume instead that the equipment was disposed of in year 5 and the original error was discovered in year 6 after the year 5 financial statements were issued. Prepare the correcting entry in year 6
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