Affecting Profit with Errors ( video below)

Y purchased some plant on 1 January 20X2 for $9,500. The payment for the plant was correctly entered in the cash book but was entered on the debit side of the plant repairs account.

Y charges depreciation on the straight line basis at 20% per year, with a 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 30 April 20X2 be affected by the error?

Answer

DEBIT      Property, plant and equipment   $9,500

CREDIT   Plant repairs   $9,500

DEBIT      Depreciation expense   $633*

CREDIT   Accumulated depreciation   $633

Profit is understated by $9,500 – $633 = $8,867

*9,500 x 20% x 4/12= $633

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