In 2027, internal auditors discovered that the company’s accountant had debited an expense account for the $760,000 cost of a machine purchased on January 1, 2024. The machine's useful life was expected to be 5 years with no residual value. Straight-line depreciation is used by the company. The journal entry to correct the error will include a credit to accumulated depreciation of:

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BlackTom AI · Accepted Answer

Question restatement: The company purchased a machine on January 1, 2024, for $760,000. It has a 5-year useful life and no residual value, using straight-line depreciation. In 2027, auditors discovered that the expense account was debited for the $760,000 cost rather than capitalizing the asset. The task is to determine the journal entry that corrects the error, specifically the amount of the credit to accumulated depreciation.

Option analysis:
- Option A: $152,000.
  This equals one year of depreciation (760,000 / 5). If the correction required a credit to accumulated depreciation, crediting only $152,000 would reflect just one year of depreciation. However, the error involved not recognizing the asset and its depreciation over multiple years, so a single year’s depreciation credit would not adequately adjust the prior mispostings. Therefore, this amount is likely too small to correct the cumulative understatement of depreciation.
- Option B: $456,000.
  This equals 3 × 152,000, i.e., three years of depreciation (2024–2026) on the machine. Given the purchase date of January 1, 2024, and the discovery in 2027, the asset should have accrued depreciation for three full years by the end of 2026 if properly recorded. The correcting entry would debit the asset (to recognize the purchase) and credit accumulated depreciation for the years that should have been recorded up to that point. Since depreciation for 2024, 2025, and 2026 would have accumulated in accumulated depreciation by 2027, crediting $456,000 aligns with correcting those three years of depreciation that were omitted due to the error.
- Option C: $304,000.
  This equals 2 × 152,000, i.e., two years of depreciation. This would correspond to correcting depreciation only for 2024 and 2025, which would be inconsistent with the timeline, as by 2027 there should have been three years of depreciation recorded (through 2026) before the 2027 financial statements. Thus this option under-adjusts the accumulated depreciation.
- Option D: $760,000.
  This equals the entire cost of the machine. Creditting the full amount to accumulated depreciation would be incorrect because accumulated depreciation should reflect depreciation charged over time, not the total original cost of the asset. The asset cost is $760,000, which would be debited to the asset account, not credited to accumulated depreciation. Moreover, accumulated depreciation would not reach the full amount in a few years given the 5-year life, so this overstates the adjustment.

Synthesis: The correction should recognize the asset’s purchase and accumulate depreciation for the years that should have been recorded prior to the discovery. By 2027, three full years (2024–2026) of depreciation should have been recorded, totaling 3 × 152,000 = 456,000. Therefore, the correcting entry would include a credit to accumulated depreciation for $456,000 to reflect those three years of depreciation that were omitted due to the initial debiting of an expense instead of capitalizing the asset.

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