On January 1, 2019, Pyle Company purchased an asset that cost $52,400 and had no estimated residual value. The estimated useful life of the asset is 8 years and straight-line depreciation is used. An error was made in 2019 because the total amount of the asset's cost was debited to an expense account for 2019 and no depreciation was recorded. Pretax income for 2019 was $42,600. How much is the correct 2019 pretax income?

Question

Business

Tania Shepherd

30 November, 01:26

On January 1, 2019, Pyle Company purchased an asset that cost $52,400 and had no estimated residual value. The estimated useful life of the asset is 8 years and straight-line depreciation is used. An error was made in 2019 because the total amount of the asset's cost was debited to an expense account for 2019 and no depreciation was recorded. Pretax income for 2019 was $42,600. How much is the correct 2019 pretax income?

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Evan Lam · Answer 1

Correct pretax income is $ 88,450

Explanation:

The correct depreciation=cost-salvage value/useful life

cost is $52,400

salvage value is $0

useful life is 8 years

annual depreciation charge = ($52,400-$0) / 8=$6,550

The annual depreciation ought to have been charged in income statement not the original cost of asset acquired.

The correction would to add the cost of the asset to the pretax income and then deduct the correct depreciation charge as below:

Pretax income $42,600

cost of asset $52,400

depreciation ($6,550)

correct pretax income $ 88,450