EX 3-25 Adjusting entries for depreciation; effect of error

On December 31, a business estimates depreciation on equipment used during the first
year of operations to be $14,500.
a. Journalize the adjusting entry required as of December 31.
b. If the adjusting entry in (a) were omitted, which items would be erroneously stated on
(1) the income statement for the year and (2) the balance sheet as of December 31?

Answer:
a. Depreciation Expense................................................... 14,500
                      Accumulated Depreciation—Equipment................ 14,500
                                  Depreciation on equipment.


b.  (1) Depreciation expense would be understated. Net income would be overstated.
     (2) Accumulated depreciation would be understated, and total assets would
          be overstated. Owner’s equity would be overstated.