Profit is first calculated as KSh 250,000. It is then found that a purchase of a machine for KSh 60,000 was charged as an expense. The machine is to be depreciated by KSh 6,000 for the year. What is the correct profit?
Answer and explanation
Correct answer: A. KSh 304,000
- Step 1: The machine is a non-current asset, so the 60,000 expense is removed: 250,000 + 60,000 = 310,000. Step 2. Then deduct depreciation of 6,000: 310,000 - 6,000 = KSh 304,000. Answer: KSh 304,000. Why not the others: KSh 310,000: That ignores the depreciation. KSh 196,000: That deducts the cost and adds back the depreciation, the wrong way round. KSh 244,000: That deducts only the depreciation and leaves the machine charged to expenses.
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