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Hi John
A company’s statement of profit or loss for the year ended 31 December 20X5 showed a profit for the year of $65,000. It was later found that $18,000 paid for maintenance to motor vehicles had been debited to the motor vehicles at cost account and had been depreciated as if it was a new motor vehicle.It is the company’s policy to depreciate motor vehicles at 25% per year on the straight line basis, with a full year’s charge in the year of acquisition. What would the profit for the year be after adjusting for this error?
In my view,Maintenance costs should be debited to the repairs and maintenance account in the statement of profit or loss, not to the motor vehicles at cost account,so Dr Maintenance costs Cr motor vehicles at cost account?but it doesn’t influence p/L,in addititon,the asset at cost is overstated ,so it should Add back depreciation charge 18000*0.25,finally,Corrected profit for the year=65000+4500=69500.
But answer is 51500,so I have some doubts.The maintenance costs do affect the Statement of profit or loss.
Maintenance costs are an expense, and so there is an extra expense of 18,000.
Therefore the corrected profit is 69,500 – 18,000 = 51,500.
Dear sir, kindly help me to solve this question.
After calculating your company’s profits for 2014, you discover that:
(A) a non-current asset costing £50000 has been included in the purchases account
(B) stationery costing £10000 has been included as closing stock of raw materials, instead of stock of stationery
These two errors had the effect of :(a) understating gross profit by £40000 and understating net profit by £ 50000
Or
(B) understating both gross profit and net profit by £40000The answer is (a), may I know how to get the answer?
Non-current assets should not be recorded as purchases.
So purchases reduce by 50,000, which means both gross profit and net profit should be higher. So at the moment both are understated by 50,000.Inventory of stationery should not reduce cost of sales, but should reduce the stationery expense instead. So it means that at the moment the gross profit is overstated by 10,000, but it has no effect on the net profit.
So the net effect is that gross profit is understated by 40,000 and the net profit is understated by 50,000.
May I know why there are no effect on the net profit since stationery expense should be reduced ?
At the moment it is being recorded as inventory of raw materials. This made the cost of goods sold lower and therefore the gross profit higher and the net profit higher as well.
However, it should be recorded as inventory of stationery, which means that the stationery expense should be reduced instead (they did not use all the stationery that they bought).
Less stationery expense makes the net profit higher.
So the net profit is not affected at all by correcting this mistake.I’m so sorry sir, I can’t fully comprehend your explanation. The net profit is not affected when the errors are corrected, but the question did not mention about correction of errors, it only stated the effects of the errors.
I understand perfectly what the question asked, and I have answered it!!
If correcting the error does not change the net profit, then it means that the net profit is not affected by the error!!
Recording the inventory of stationery as inventory of materials, means that the cost of sales is understated and therefore the gross profit is overstated.
At the same time however, it means that the expense for stationery is overstated.
If the gross profit is overstated and the expenses are overstated as well, then the net profit is not affected.
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