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ACCA Applied Knowledge · Financial Accounting · General ledger accounts and journal entries

At the year end, Harlow Co's inventory of consumables was $3,000 and had been fully expensed on purchase. Separately, an invoice of $5,400 for a machine bought on credit was debited to repairs expense. The machine should be depreciated at 10% a year with a full year's charge in the year of purchase. What is the net effect on profit of correcting only the machine error?

Profit increases by $4,860. Capitalising the machine removes the $5,400 repairs expense, but a full year's depreciation of $540 at 10% must be charged, so the net increase is $4,860.

  1. AProfit increases by $5,400
  2. BProfit decreases by $540
  3. CProfit increases by $4,860Correct
  4. DProfit decreases by $4,860

Explanation

Correct by Dr Machine $5,400, Cr Repairs $5,400, increasing profit by $5,400. Then depreciation of 10% x $5,400 = $540 reduces profit. Net increase is $4,860. Option A omits depreciation, and the consumables detail is irrelevant.

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