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I want to ask about ledger account in the below question.
Y purchased some plant on 1 Jan 2010 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 repair accounts. Y charges depreciation on the straight line basis at 20% per year, with 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 2010 be affected by the error?
In the question, they said they bought the plant with cash but it was entered on the debit side of the plant repair accounts.
But plant repair was entered on the credit side of it on the answer sheet.
It’s very hard to understand for me how to get the answer and how I can determine profit is understated or overstated.
You do not need to prepare t-accounts to answer this question. (There is very little testing of t-accounts in the exam, and to prepare them just wastes time.)
The 38,000 should be debited to the plant asset account, and not to plant repairs (so plant repairs needs crediting to remove it from that account).
As far as the profit is concerned (which is what the question is asking). the 38,000 has been recorded as an expense but it is not an expense (it is an asset). So expenses need reducing which means the profit should be higher by 38,000.
In addition, because it has not been recorded as an asset, depreciation will not have been charged on it. Depreciation should be charged (of 3/12 x 20% x 38,000) and so the profit needs to be reduced by this amount.
Have you not watched my free lectures on ‘adjustment to profit’? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.