On December 31,2012,the adjusting entry for depreciation was made incorrectly.The following entry 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 income statement,and identify which of the following statements is TRUE.
A) Net income is overstated by $3,600.
B) Net income is understated by $3,600.
C) Net income is understated y $1,500.
D) Net income is not affected by this error.

Question

On December 31,2012,the adjusting entry for depreciation was made incorrectly.The following entry 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 income statement,and identify which of the following statements is TRUE.
A) Net income is overstated by $3,600.
B) Net income is understated by $3,600.
C) Net income is understated y $1,500.
D) Net income is not affected by this error.

Quizplus · Accepted Answer

The correct depreciation expense should have been $5,100, but only $1,500 was recorded. This means an additional $3,600 ($5,100 - $1,500) of expense was not recorded. Since expenses reduce net income, recording less expense than should have been recorded means net income is overstated by $3,600.

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