A business purchased a motor car on 1 July 2014 for $40,000 It is to be depreciated at 20% per cent per year on the straight line basis, assuming a residual value at the end of five years of $5,000. with a proportionate depreciation charge in the years of purchase and disposal.

The $40,000 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 2014 be affected by the error?

Suggested solutions:

Working :

Annual depreciation = (Cost - Residual value)/ years X 6/12 months

Annual depreciation = (40,000 -5,000 )/ 5 X 0.5

Annual depreciation =3,500 ;

Add MV REPAIRS	40,000
Less Depreciation expenses	(3,500)
Profit understated by	36,500

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