Dimmu Company purchased a machine on January 1, 2021, at a cost of P 120.000. An additional P 50.000 was spent for installation, but this amount was charged erroneously to Repairs Expense and not discovered until 2013. The machine has a useful life of five years and a salvage value of P 20.000. As a result of the error, a. retained earnings at December 31, 2022, was understated by P 30,000, and 2022 income was overstated by P 6,000. b. retained earnings at December 31, 2022, was understated by P 38,000, and 2022 income was overstated by P 6,000. c. 2021 income was understated by P 50,000. d. retained earnings at December 31. 2022, was understated by P 30,000, and 2022 income was overstated by P 10,000.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Dimmu Company purchased a machine on January 1, 2021, at a cost of P 120.000. An additional P 50.000 was spent for installation, but this amount was charged erroneously to Repairs Expense and not discovered until 2013. The machine has a useful life of five years and a salvage value of P 20.000. As a result of the error,
a.
b. retained earnings at December 31, 2022, was understated by P 38,000, and 2022 income was overstated by P 6,000.
c. 2021 income was understated by P 50,000.
d. retained earnings at December 31. 2022, was understated by P 30,000, and 2022 income was overstated by P 10,000.
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