ExpertHard2 marksMultiple Choice
ACCA · Question 21 · Correction of Errors
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?
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:
A.
$170,000
B.
$168,000
C.
$130,000
D.
$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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