A business purchased a car on 1 July 2010 for $20 000.

It is to be depreciated at 20% per year on the straight-line basis, assuming a residual value at the end of five years of $4000, with a proportionate depreciation charge in the year of purchase. The $20 000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles repairs account. How will the business’s profit for the year ended 31 December 2010 be affected by the error?

a. Understated by $18 400

b. Understated by $16 800

c. Understated by $18 000

d. Overstated by $18 400 ACCA adaptedLO1.