Problem 4
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Problem 4. (error correction and depreciation)
The delivery trucks account of your client, MM Co., had a balance of 2,820,000 on Jan. 1, 2016, which included the ff.:
Truck no. Acquisition date Cost
1 Jan. 1, 2013 540,000
2 July 1, 2013 660,000
3 Jan. 1, 2015 900,000
4 July 1, 2015 720,000
The accumulated depreciation-delivery trucks account had a balance of 906,000 on Jan. 1, 2016. This amounts represent the depreciation on the four trucks from the respective dates of acquisition, based on a 5 year life, no salvage value. No charges had been made against this account before Jan. 1, 2016.
Transactions completed during the period Jan. 1, 2016 through Dec. 31, 2019, and the entries made to record were as follows:
July 1, 2016
Truck no. 3 traded for a larger truck (truck no. 5), the agreed price of which was 1,020,000. MM paid the dealer 500,000 cash on the transaction. The entry was:
Delivery truck 500,000
Cash 500,000
Jan. 1, 2017
Truck no. 1 was sold for 110,000. The entry made was:
Cash 110,000
Delivery truck 110,000
July 1, 2018
A new truck (truck no. 6) was purchased for 1,080,000 cash and was debited at that amount to the delivery trucks account. (Assume truck no. 2 was not retired)
July 1, 2018
Truck no. 4 was severely damaged in an accident and was sold as junk for 21,000 cash. MM received 75,000 from the insurance company. The entry made by the accountant was:
Cash 96,000
Sales 21,000
Delivery trucks 75,000
Entries for depreciation expense had been made at the end of each financial year as follows:
Year Depreciation expense
2015 609,000
2016 633,000
2017 733,500
2018 834,000
What amount of gain/loss should have been recognized on the trade in of Truck no. 3 on July 1, 2016? _________________
MM's net income for 2016 was overstated/understated by _______________________
The gain/loss on the sale of truck no. 1 on Jan. 1, 2017 ___________________
MM's net income for 2017 was overstated/understated by _______________________
What amount of loss should have been recognized on the sale of Truck no. 4 on July 1, 2018? _________
MM's net income for 2014 was overstated/understated by _____________________
What amount of depreciation should have been recorded in 2019? _____________________
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