Draft net profit for the year is $150,000. It is subsequently discovered that a purchase of machinery for $20,000 was incorrectly recorded as a purchase of inventory. The machinery should have been depreciated at 10% straight-line for a full year. What is the revised net profit after correcting this error?

Answer options:

$170,000

$168,000

$130,000

$128,000

How to approach this question

Reverse the incorrect expense (which increases profit) and record the correct expense (which decreases profit).

Full Answer

B.$168,000✓ Correct

The $20,000 was incorrectly treated as an expense (purchases), reducing profit. To correct this, we add $20,000 back to profit. However, the machinery should have been capitalized and depreciated. Depreciation = 10% * $20,000 = $2,000. This is a valid expense that must be deducted. Revised profit = $150,000 + $20,000 - $2,000 = $168,000.

Common mistakes

Forgetting to calculate and deduct the depreciation on the newly capitalized asset.

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