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Y purchased some plant on 1 January 20X0 for $38,000. The payment for the plant was correctly entered in the cash book but was entered on the debit side of the plant repairs account.
Y charges depreciation on the straight line basis at 20% per year, with a proportionate charge in the years of acquisition and disposal, and assuming no scrap value at the end of the life of the asset.How will Y’s profit for the year ended 31 March 20X0 be affected by the error?
A Understated by $30,400
B Understated by $36,100
C Understated by $38,000
D Overstated by $1,900Answer is B. but my question is, why we less depreciation.
i posted in the wrong account, and treated capital expenditure as a revenue expenditure. So my profit should be reduced by, 38000 + 1900 (depreciation charge for the periods)=39900
please correct me if I’m wrong.The payments was wrongly entered as an expense. It should not be recorded as an expense so the profit is understated by $38,000.
Depreciation will not have been recorded and should have been, so for this the profit is currently overstated by 1,900.So the end result is that the profit is understated by 38,000 – 1,900 = $36,100
3 months depreciation at 20% per year on $38,000 = $1,900
(3/12 x 20% x 38,000)
Question from ACCA X :
Zed Co has a machine that was initially estimated to have a residual value of $20,000. Technology has now advanced and on 31 December 20X4 the business changes the asset’s estimated residual value to nil.
The machine was purchased on 1 January 20X0 for $250,000 and its estimated useful life (EUL) was ten years. The EUL remains unchanged.
What is the depreciation expense for the machine for the year ended 31 December 20X5?I’ve solved this question and got it correct (27,000), and I have the solution.
Question from BPP:
A business purchased an asset on 1 Jan 20X1 at a cost of $160,000. The asset had an expected life of 8years and a residual value of $40,000. Straight line method is used to measure depreciation. The financial year ends on 31 Dec.
At 31 Dec 20X3 the estimated remaining life of the asset from that date is now expected to be only 3 more years, but the residual value remains unchanged.
What will be the net book value of the asset as at 31 December 20X3, for inclusion in the statement of financial position?The answer is 107,500 and I do understand how to solve it.
The BPP’s solution applies the changes in the current year right away, which I do agree because this is considered as a change in accounting estimate; we apply the changes in the current year & future.
So my question is, why did the first question not apply the same way? Are changes in residual value not part of a change in accounting estimate?
The BPP answer is correct but the ACCA X answer is wrong.
The depreciation for 20×4 is calculated at 31 December 20×4 and so the calculation should take account of the new information known as at 31 December 20X4. So the depreciation for the year to 31 December 20×4 should have been calculated using a new residual value of nil.
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