In 2009, Internal Auditors Discovered That Fay, Inc

question 90

Multiple Choice

In 2009, internal auditors discovered that Fay, Inc. had debited an expense account for the $700,000 cost of a machine purchased on January 1, 2006. The machine's useful life was expected to be 5 years with no residual value. Straight-line depreciation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:

• A)$140,000.
• B)$280,000.
• C)$420,000.
• D)$700,000.During the three year period, depreciation expense was understated by $420,000, but other expenses were overstated by $700,000, so net income during the period was understated by $280,000, which means retained earnings is currently understated by that amount.During the three year period, accumulated depreciation was understated, and continues to be understated by $420,000.To correct incorrect accounts

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Definitions:

Process Cost System

An economic tracking system utilized for attributing costs to analogous products manufactured in large quantities and in a steady flow.

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Job Order Costing

An accounting method used to track the production costs for specific jobs or batches, identifying the direct materials, direct labor, and overhead per job.

Process Costing

A costing method used by companies that produce similar or identical units of product in batches employing a consistent process.