g Hondae Inc. purchased equipment on January 1, 2018, at a cost of $320,000. The company estimated a $8,000 salvage value and that the equipment will have a useful life of 10 years. The company elected to use the straight-line depreciation method. In entering the information for the asset into the depreciation system, the salvage value was inadvertently entered as $80,000 instead of $8,000. Ignoring income taxes, record the journal entry to correct the error discovered in 2021.

Honda Inc.

Journal

To correct the error:

Debit Retained Earnings $21,600

Credit Accumulated Depreciation $21,600

To record the correction of depreciation error.

For the current year:

Debit Depreciation Expense $31,200

Credit Accumulated Depreciation $31,200

To record the depreciation expense for the year.

Explanation:

a) Data and Calculations:

January 1, 2018 Purchase of Equipment at a cost = $320,000

Estimated salvage value = $8,000

Recorded salvage value = $80,000

Estimated useful life = 10 years

Annual depreciation expense based on recorded salvage value = ($320,000 - 80,000)/10 = $24,000

Accumulated depreciation for 3 years (2018 to 2020) = $72,000 ($24,000 * 3 years)

Correct annual depreciation expense = ($320,000 - 8,000)/10 = $31,200

This means that depreciation expense was being understated annually by $7,200 ($31,200 - $24,000).