Reversal of depreciation?


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Hello,

I am wondering if anyone can help with the below issue.

A non current asset was purchased for $20,000. It has been added to the fixed asset register and since then over $9,000 depreciation was charged. It has recently turned out the company never purchased this asset. How to reverse these incorrect accounting allocations?

regards,
Kevin
 
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I just have to ask--is this a homework problem? This sounds like a homework problem.

I mean, how would the company not notice it didn't have a $20,000 fixed asset it thought it had bought? And long enough that it had booked depreciation against it? Your description of this situation goes klunk.
 
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Im afraid this is a real case scenario. Im not here to answer how this hasn't been noticed for such a long time, I'm here for accounting help :)
 

BIG E

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You reverse it by AMENDING each of the returns effected by the incorrect depreciation calculation, and this includes changing the balance sheet disclosure of fixed assets and accumulated depreciation.
 
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First of all, it's an error in the accounting record. As per IAS-8, it should be dealt retrospectively. So, the cost, accumulated depreciation, and NBV will be removed from the books. Similarly, opening retained earning will be credited equal to accumulated depreciation. In simple words, depreciation charged in the income statement (as of now) will be credited back in opening retained earnings, and asset is set to be removed from the books.
 
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I think you have to reverse the entries made in the prior year retrospectively like this
1.Cash $20,000 (Debit)
Machine $20,000 (Credit)

2.Accumulated dep $9,000 (Debit)
Retained earning $9,000 (credit)

note: we didn't reversed depreciation expense because it is an item of income statement which is prepared for the year and if we credit depreciation expense it will reduce the expense of the current year which is not appropriate so we have to reverse it from prior year's profit .All the prior year's profit are accumulated in retained earning account...
 
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kirby

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Hi Kevin,
For US GAAP, reverse the error in the current period ( i.e. that means post the credit to the P&l and not to retained earnings) UNLESS the error amount was material to the prior periods. If so, then make a prior period adustment.
And be sure to follow what Big E said about amending your tax returns.
 

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