A business started three years ago. The following data is available: Cost at the beginning of Year 1 10,000 Accumulated depreciation at the end of Year 3 6,000 Draft profit for Year 3 18,000 Draft profit was calculated using straight-line depreciation. Before closing, the business changed to the reducing balance method at 25% per annum for Year 3. What is the adjusted profit for Year 3?

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SSC Financial and Cost Accounting P-1 QUESTION #6074

Question 1

A business started three years ago. The following data is available:

Cost at the beginning of Year 1	$10,000
Accumulated depreciation at the end of Year 3	$6,000
Draft profit for Year 3	$18,000

Draft profit was calculated using straight-line depreciation. Before closing, the business changed to the reducing balance method at 25% per annum for Year 3. What is the adjusted profit for Year 3?

$16,000
$17,500
$18,500✔️
$19,000

Correct Answer Explanation

1. Straight-line depreciation = $6,000 / 3 years = $2,000 per year.
2. Net Book Value (NBV) at start of Year 3 = $10,000 - ($2,000 $\times$ 2) = $6,000.
3. New Depreciation (Reducing Balance) = $6,000 @ 25% = $1,500.
4. Difference = $2,000 (old) - $1,500 (new) = $500 reduction in expense.
5. Revised Profit = $18,000 + $500 = $18,500.

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