A business purchased a motor car on 1 July 20X6 for $5,000. It is to be depreciated at 10 per cent per year on the straight line basis, assuming a residual value at the end of ten years of $1,000, with a proportionate depreciation charge in the years of purchase and disposal.
The $5,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles repairs account.
How will the business profit for the year ended 31 December 20X6 be affected by the error?
Answer
| $ | |
| Repairs cost overstated | 5,000 |
| Depreciation understated ((5,000 – 1,000) x 10% x 6/12) | (200) |
| Profit understated | 4,800 |