The net income for 2018 reported by the accountant of OH MAH GAHD Company amounted to P634,500. Your audit of the accounts disclosed that the following accounts were not properly accounted: 2017 2018 Rent received in advance 22,500 30,000 Accrued salaries 13,500 18,000 Prepaid interest 33,750 45,000 Commission receivable 15,750 14,625 Depreciation expense 26,250 26,250 Equipment purchased at the beginning of the year charged to expense (10 year life) 75,000 10. What is the pre-tax net effect of the above errors on retained earnings on December 31, 2018? A. 3,375 understated B. 3,375 overstated C. 19,125 understated D. 19,125 overstated
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.
The net income for 2018 reported by the accountant of OH MAH GAHD Company amounted to P634,500. Your audit of the accounts
disclosed that the following accounts were not properly accounted:
2017 2018
Rent received in advance 22,500 30,000
Accrued salaries 13,500 18,000
Prepaid interest 33,750 45,000
Commission receivable 15,750 14,625
Equipment purchased at the beginning of the year
charged to expense (10 year life) 75,000
10. What is the pre-tax net effect of the above errors on
A. 3,375 understated B. 3,375 overstated C. 19,125 understated D. 19,125 overstated
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