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In 2021, it was discovered that a company had debited expense for the full cost of an asset purchased on January 1, 2018. The cost was $42 million with no expected residual value. Its useful life was 7 years and straight-line depreciation is used by the company. The correcting entry assuming the error was discovered in 2021 before the adjusting and closing entries includes:

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Answer and Explanation:

The journal entry is shown below:

Asset $42 million  

          To Accumulated Depreciation $18 million ($42 ÷ 7 years × 3 years)

          To Retained earning $24 million ($42 ÷ 7 years × 4 years)

(Being the correct entry is recorded)  

The asset is debited as it increased the asset and accumulated depreciation & retained earning is credited as it decreased the assets but increased the stockholder equity

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