ACCA Applied Knowledge · Financial Accounting · Correction of errors
A company's draft profit for the year is $48,000. It later finds that a repair costing $6,000 to machinery was debited to the machinery cost account as a non-current asset. Machinery is depreciated at 10% per year on cost, with a full year's charge in the year of purchase, and this item was recorded in the current year. What is the corrected profit?
Corrected profit is $42,600. The $6,000 repair should have been expensed, reducing profit to $42,000. The depreciation of $600 charged on the wrongly capitalised amount must be removed, increasing profit back by $600. Ignoring that depreciation gives the wrong figure of $42,000.
- A$42,000
- B$42,600Correct
- C$41,400
- D$54,000
Explanation
The repair is revenue expenditure, so profit falls by $6,000 to $42,000. The wrongly charged depreciation of $600 (10% x $6,000) is then reversed, giving $42,600. Option $42,000 ignores the depreciation adjustment.
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