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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
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