A business incurred £2,000 for machine repairs but debited the Machinery at Cost account. Depreciation is charged at 20% per annum (straight-line). What is the impact on the Net Profit?

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Multiple choice — select the best answer

ANet profit understated by £1,600
BNet profit overstated by £2,400
CNet profit understated by £400
DNet profit overstated by £1,600
ENet profit overstated by £2,000

✓ Correct answer: D. Net profit overstated by £1,600 Capitalizing the repair overstates profit by £2,000. The resulting depreciation charge ($$2,000 \times 20\%$$) reduces profit by £400. The net effect is an overstatement of $$2,000 - 400 = 1,600$$.

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A business incurred £2,000 for machine repairs but debited the Machinery at Cost account. Depreciation is charged at 20% per annum (straight-line). What is the impact on the Net Profit?

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