(Correction of an accounting error, LO 3) In fiscal 2002, Ioco Inc. (loco) purchased capital assets for $1,000,000. The capital assets were supposed to be amortized over five years on a straight-line basis. However, for some reason, these assets were not amortized. Ioco’s new controller discovered the error while she was reviewing the accounting records in late 2008. Retained earnings on December 31, 2007, Ioco’s last year end, was $12,340,000.

Required:

Prepare the journal entry that must be made in Ioco’s books to correct the error.

What would retained earnings be on December 31, 2007 after the error had been corrected? Explain why the error is corrected in this way.