Recognize Transaction incorrectly Affect Profit ( video below)
A manufacturing company receives an invoice on 30 April 20X5 for work done on one of its machines. $6,375 of the cost is actually for a machine upgrade, which will improve efficiency. The accounts department do not notice and charge the whole amount to maintenance costs. Machinery is depreciated at 20% per annum on a straight-line basis, with a proportional charge in the years of acquisition and disposal. By what amount will the profit for the year to 31 December 20X5 be understated?
Answer
The profit will be understated
= cost less 8 months depreciation = 6,375 – 6,375 x 20% x 8/12
= 6,375 -850= $5,525
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