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In the year to 30 November 2009, Lui accounted for $7,000 of expenditure on machinery repairs as the cost of a new machine. Lui depreciates machinery on a straight-line basis over 10 years and charges depreciation for a full year in the year an asset is acquired.
What is the effect of the error on Lui’s profit for the year to 30 November 2009?
A understated by $6,300
B understated by $7,700
C overstated by $6,300
D overstated by $7,700Answer is C : 6,300
Why do I need to minus the $700?
It’s the depreciation expense on the wrongly capitalised repairs.$7000/10 =$700. This therefore results in net overstatement of $6300. Hope this helps.
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