Question

Before the 2011 books are closed, you discover that on January 2, 2011, when a new machine was purchased for $20,000, the $20,000 was debited to Machinery Maintenance Expense. The new machine, which is being depreciated under the straight-line method, has a 10-year life and no estimated salvage value. If no correction is made then ________

Answer 1

If no correction is made for the machine's purchase, the company's expenses will be overstated and net income understated. The purchase should have been capitalized and depreciated over 10 years resulting in an annual depreciation expense of $2,000.

Step-by-step explanation:

If no correction is made for the improper accounting treatment of the new machine, it means the financial statements will not accurately reflect the company's financial position. The purchase should have been capitalized as an asset and depreciated over its useful life, rather than being expensed immediately. As a result, the company's expenses would be overstated and its net income understated for the year 2011.

The correct journal entries to reflect the purchase of the machine would involve reversing the expense and recording it as a fixed asset. Depreciation expense for the year should also be recognized, calculated as the cost of the machine divided by its useful life. In this particular situation, the annual depreciation would be $2,000 ($20,000/10 years), affecting both the balance sheet (reducing assets and equity) and the income statement (increasing expenses).