On July 1, 2020, E. Cristobal Corp. acquired a service vehicle or P200,000. It is to be depreciated on a straight line basis at 20% per year. The estimated salvage value is P40,000 at the end of 5 years. The corporation makes proportionate depreciation charges in the year of purchase. The P200,000 cost was correctly credited but posted as a debit to the repairs account. How will the profit for the year ended Dec. 31, 2020 be affected by the error? a. Understated by P184,000 b. Understated by P168,000 c. Overstated by P184,000 d. Overstated by P200,000
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.
On July 1, 2020, E. Cristobal Corp. acquired a service vehicle or P200,000. It is to be
a. Understated by P184,000
b. Understated by P168,000
c. Overstated by P184,000
d. Overstated by P200,000
What is the best answer? Explain why each of the other choices is not the answer
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