Question

After the accountant of Samaras Co. had prepared the financial statements for the year ended 31 January 2017, the following errors came to light:

1) A motor van purchased at a cost of $12,000, with accumulated depreciation at the beginning of the year of $4,000, had been depreciated at 20% using the reducing balance method rather than the straight-line method of depreciation.

2) The payment of $1,500 for a trade payable had been treated as a cash purchase.

3) Withdrawals by the owner of $3,000 during the year had been treated as part of the salaries and wages expense.

4) Bank charges of $400 during the year had been treated as interest charges. The profit for the year before these errors were discovered was $42,000. What is the profit for the year after adjusting for these errors.

Answer 1

Net profit before the errors	42,000
Add: Depreciation under reducing balance	1600
Less: Depreciation under straight line method	2000
Add: Incorrect cash purchase	1500
Add: Drawings by owner	3000
Profit after adjusting the errors	46,100

Assumptions:

1.

Purchase price	12000
Less : accumulated dep	4000
Written down value	8000
Depreciation for the year @ 20%	1600

Straight line depreciation is assumed as 6 years since accumulated depreciation is $4000. Assumed in the absence of any information. Straight line method depreciation each year = 12000 /6= 2000

2. Treating bank charges as interest charges will not have any affect on profit.

Any doubt please comment. If there are options please provide.