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A manufacturing company receives an invoice on 29 February 20X2 for work done on one of its
machines. $25,500 of the cost is actually for a machine upgrade, which will improve efficiency. The
accounts department do not notice and charge the whole amount to maintenance costs. Machinery is
depreciated at 25% per annum on a straight-line basis, with a proportional charge in the years of
acquisition and disposal.
By what amount will the profit for the year to 30 June 20X2 be understated?
A $19,125
B $25,500
C $23,375
D $21,250i dont understand as 25500 is already treated as an expense and why it is reduced of depreciation charge 2125 from 25500. I am confuse as depreciation charge is also expense. so according to my view answer must be 27625?.
The $25,500 is a machine upgrade and therefore should have been capitalised (i.e. recorded as a non-current asset) and not charged as an expense.
Therefore the expense needs removing which means the profit will increase.
In addition, when it is properly recorded as a non-current asset it should be depreciated (and at the moment this has not happened). When depreciation is charged, this will then reduce the profit.
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