Question

A non-current asset was depreciated at the end of the first year of ownership using the straight-line method based on the following information. Cost $20 000 Working life 4 years Residual value $4000 It was then found that the reducing balance method at 30% per annum should have been used. What was the effect on the profit for the year of correcting this error?

A Decrease by $2000
B Increase by $2000
C Decrease by $6000
D Increase by $6000

Answer 1

Correcting the error, the residual value of the product would increase by $802.

Step-by-step explanation:

Since a non-current asset was depreciated at the end of the first year of ownership using the straight-line method based on the following information: Cost $ 20,000 Working life 4 years Residual value $ 4000; and it was then found that the reducing balance method at 30% per annum should have been used, to determine what was the effect on the profit for the year of correcting this error the following calculation should be performed:

100 - 30 = 70

Year 0: 20,000

Year 1: 20,000 x 0.7 = 14,000

Year 2: 14,000 x 0.7 = 9,800

Year 3: 9,800 x 0.7 = 6,860

Year 4: 6,860 x 0.7 = 4,802

Thus, correcting this error, the residual value of the product would increase by $ 802.