In 2016, Internal auditors discovered that Fay Inc., had debited an expense account for its $980,000 cost of a machine purchased on January 1, 2013. The machines's useful life was expected to be 7 years with no residual value. Straight-line deprectiation is used by Fay. The journal entry to correct the error will include a credit to accumulated depreciation of:.
A) $420,000
B) $280,000
C) $140,000
D) $980,000

The correct answer is C

Explanation:

The amount of depreciation expense is computed using the SLM (stands for Straight Line Method) as:

Depreciation expense = Cost of machine - Residual value / Number of life years

where

Cost of machine is $980,000

Residual value is $0

Number of life years is 7 years

Putting the value above:

Depreciation expense = $980,000 - $0 / 7

= $980,000 / 7

= $140,000

The entry which is to be recorded as:

Depreciation Expense A/cDr    $140,000

     Accumulated Depreciation A/cCr    $140,000

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