Question - Depreciation and Error Analysis A depreciation schedule for semi-trucks of Ichiro Manufacturing Company was requested by your auditor soon after December 31, 2011, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2008 to 2011, inclusive. The following data were ascertained.
Balance of Semi-trucks account, Jan. 1, 2008
Truck No. 1 purchased Jan. 1, 2005, cost $18,000
Truck No. 2 purchased July 1, 2005, cost 22,000
Truck No. 3 purchased Jan. 1, 2007, cost 30,000
Truck No. 4 purchased July 1, 2007, cost 24,000
Balance, Jan. 1, 2008 $94,000
The Semi-trucks-Accumulated Depreciation account previously adjusted to January 1, 2008, and entered in the ledger, had a balance on that date of $30,200 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2008. Transactions between January 1, 2008, and December 31, 2011, which were recorded in the ledger, are as follows.
July 1, 2008 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was $40,000. Ichiro Mfg. Co. paid the automobile dealer $22,000 cash on the transaction. The entry was a debit to Semi-trucks and a credit to Cash, $22,000. The transaction has commercial substance.
Jan. 1, 2009 Truck No. 1 was sold for $3,500 cash; entry debited Cash and credited Semi-trucks, $3,500.
July 1, 2010 A new truck (No. 6) was acquired for $42,000 cash and was charged at that amount to the Semi-trucks account. (Assume truck No. 2 was not retired.)
July 1, 2010 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for $700 cash. Ichiro Mfg. Co. received $2,500 from the insurance company. The entry made by the bookkeeper was a debit to Cash, $3,200, and credits to Miscellaneous Income, $700, and Semi-trucks, $2,500. Entries for depreciation had been made at the close of each year as follows: 2008, $21,000; 2009, $22,500; 2010, $25,050; 2011, $30,400.
(a) For each of the 4 years compute separately the increase or decrease in net income arising from the company's errors in determining or entering depreciation or in recording transactions affecting trucks, ignoring income tax considerations.
(b) Prepare one compound journal entry as of December 31, 2011, for adjustment of the Semi-trucks account to reflect the correct balances as revealed by your schedule, assuming that the books have not been closed for 2011.