Before closing the books, ₹12,000 paid for machinery installation was debited to Wages Account. If depreciation on machinery is 10% per annum, what is the net impact on Net Profit?
Answer and explanation
Correct answer: A. Net Profit was understated by ₹10,800
- Step 1: Installation wages of ₹12,000 is capital expenditure. Wrongly debiting it to Wages overstated expenses by ₹12,000.
- Step 2: Had it been capitalized, depreciation of would have been charged.
- Step 3: Therefore, expenses were net overstated by , causing Net Profit to be understated by ₹10,800.
Answer
Net Profit was understated by ₹10,800.
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