Question

In 2014, Rigolet Ltd. purchased a small delivery truck for $36,000. In error, Rigolet's bookkeeper recorded the purchase as an expense rather than classifying it as an asset. The error went unnoticed until late in 2017, when the truck was sold for $6,000 and no record could be found of it in the accounts.

Required:
a. Show the entry that Rigolet's bookkeeper made to record the purchase of the truck.
Show the entry that should have been made.
b. Rigolet uses straight-line depreciation for its vehicles and the useful life assigned to similar vehicles is five years with a $5,000 residual value. What would have been the effect of the error on net income and total assets (amount and direction of the error) in 2014, 2015, and 2016?
c. What would be the effect of the error on net income and total assets (amount and direction of the error) in 2017, the year the truck was sold?
d. What would be the effect of the error on the cash flow statement in each of years 2014 through 2017?
e. Assuming the error is material, what would the implications of this error be for users of the financial statements? Explain.



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  • CreatedFebruary 26, 2015
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