Use the following information for questions.
In January 2012, Marcus Ltd.has installation costs of £9,000 on new machinery that were charged to Repair Expense.Other costs of this machinery of £30,000 were correctly recorded and have been depreciated using the straight-line method with an estimated life of 10 years and no residual value.At December 31,2012, Marcus decides that the machinery ha a remaining useful life of 15 years, starting with January 1,2012
-In 2012, Krasny Corporation discovered that equipment purchased on January 1,2010, for €52,500 was expensed at that time.The equipment should have been depreciated over 5 years, with no residual value.The effective tax rate is 30%.Krasny's 2012 journal entry to correct the error would include

Question

Quizplus · Accepted Answer

To correct the error, Krasny Corporation needs to record the equipment as an asset and start depreciating it over 5 years. The equipment was expensed at €52,500, so a corresponding credit of €52,500 should be made to the expense account. However, since this error was made in 2010 and it was discovered in 2012, Krasny needs to make an adjustment for the two years that have passed. Using the straight-line method of depreciation, the total depreciation over 5 years would be €52,500/5 = €10,500 per year. For 2 years, the depreciation that should have been recognized is €10,500 x 2 = €21,000. Since the effective tax rate is 30%, the tax savings due to this adjustment would be 30% of €21,000 = €6,300. Therefore, the journal entry would be:
Debit: Equipment €52,500
Credit: Repair Expense €52,500
Credit: Retained Earnings €22,050 (€21,000 + €6,300 x (1-30%))
Credit: Deferred Tax Liability €6,300

Use the Following Information for Questions