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A company’s statement of profit or loss for the year ended 31 December 20X5 showed a net profit of $83,600. It
was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account.
It is the company’s policy to depreciate motor vans at 25% per year on the straight line basis, with a full year’s charge
in the year of acquisition.What would the net profit be after adjusting for this error?
A $106,100
B $70,100
C $97,100
D $101,600Please explain step by step
I think the answer is C.
The way I would tackle this question would be to firstly correct error of debiting motoring expenses as this is not a motoring expense.It is instead the purchase of a non-current asset.By removing this expense it has the effect of increasing profit by 18000 dollars.This gives us 101600 dollars profit.However,depreciation has to be taken into account.Depreciation is twenty five per cent straight line per year.100/25=4.So it is to be depreciated over 4 years.18000/4=4500.Charged in full first year as per question.101600-4500=97100 dollars as depreciation is an expense.
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