On December 31,2012,the adjusting entry for depreciation was made incorrectly.The following is the entry which was made erroneously: $$\begin{array} { | l | r | r | }
\hline \text { Depreciation expense } & 1,500 & \
\hline \text { Accumulated depreciation } & & 1,500 \
\hline
\end{array}$$ The correct amount of depreciation should have been $5,100.Consider the effects of this error on the balance sheet,and identify which of the following statements is TRUE.
A) Total liabilities are overstated by $3,600.
B) Total liabilities are understated by $3,600.
C) Total assets are overstated by $3,600.
D) Total assets are understated by $3,600.

Question

On December 31,2012,the adjusting entry for depreciation was made incorrectly.The following is the entry which was made erroneously: $$\begin{array} { | l | r | r | } 
\hline \text { Depreciation expense } & 1,500 & \
\hline \text { Accumulated depreciation } & & 1,500 \
\hline
\end{array}$$ The correct amount of depreciation should have been $5,100.Consider the effects of this error on the balance sheet,and identify which of the following statements is TRUE.
A) Total liabilities are overstated by $3,600.
B) Total liabilities are understated by $3,600.
C) Total assets are overstated by $3,600.
D) Total assets are understated by $3,600.

Quizplus · Accepted Answer

The error in recording depreciation too low by $3,600 means that the expense was understated, and consequently, the accumulated depreciation was also understated. This results in the assets being overstated by $3,600 because less depreciation expense was recognized than should have been, leading to a higher net book value of the assets.

On December 31,2012,the Adjusting Entry for Depreciation Was Made Incorrectly