What is the adjusting entry to remove an item that was incorrectly capitalized and depreciated for three years? I believe I would reverse the asset entry and remove the accumulated depreciation. But what is the entry? Also to note, this was not sold, but rather just a one-off cost and use of carpet at a trade show. We did not take the carpet with us. Please help!
Are you sure the carpet wasn't a capital asset used in business? The definition of a capital asset includes the fact that it has a use beyond one year. I wasn't sure whether it had been used only the first year, or whether it had been used for 3 years and then discarded.
1. If it had only been used in the year of acquisition, you are correct that it shouldn't have been a capital asset. The entire amount should have been charged to expense in that year. In that case, all three years are incorrect for financial statement ...
The solution presents two possible choices for the scenario presented. There are complete explanations as well as the format of the journal entry for correction.