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1.Net profit was calculated as $10,200. It was later discovered that capital expenditure of $3,000 had been treated as revenue expenditure and revenue receipt of $1,400 has been calculated as capital expenditure
What is the correct net profit?
The answer is $14,600(10,200+1400+3000)
Could you tell me why the figures are added?2.-A NCA costing $50,000 has been included in the purchases account.
-Stationary costing $10,000 has been included as closing inventory of raw material, instead of stationary expenseWhat is the effect of these errors on gross profit and net profit?
The answer is understatement of gross profit $40,000 and understatement of net profit by $30,000How to reach this answer?
1. Because at the moment there is too much expense. Reducing the expense increases the profit.
There is also income that has not been treated as income – more income increases the profit.2. $50,000 should not be included in purchases – this means gross profit and net profit should both be higher by $50,000.
$10,000 at the moment in reducing cost of sales – it should not be, and so cost of sales should be higher and therefore gross profit should be lower by $10,000.
It should be shown as an expense instead which reduces net profit by $10,000 as well.1.”capital expenditure of $3,000 had been treated as revenue expenditure”
Why this $3,000 has been added because capital expenditure and revenue expenditure are both expense.2. I do understand your point but in the BPP book, the answer is understatement of gross profit $40,000 and understatement of net profit by $30,000
1. Capital expenditure is purchase of non-current assets and appears in the SOFP – not in the Statement of profit or loss. Read paragraph 5 of Chapter 2 in our free lecture notes.
2. Yes – and that is what I have written!
For gross profit, 50,000 – 10,000 = 40,000.
For net profit, 50,000 – 10,000 – 10,000 = 30,000
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