Question

Travis Company's records show that overhead was overapplied by $10,600 last year. This overapplied overhead was closed out to the Cost of Goods Sold account at the end of the year. In trying to determine why overhead was overapplied by such a large amount, the company has discovered that $6,400 of depreciation on factory equipment was charged to administrative expense in error. Given the above information, which of the following statements is true?

Multiple Choice

• The company's net income is understated by $6,400 for the year.

• Under the circumstances posed above, the error in recording depreciation would have no effect on operating income for the year.

• Manufacturing overhead was actually overapplied by $17,000 for the year.

• The $6,000 in depreciation should have been charged to Work-in-Process rather than to administrative expense.

Answer 1

Ans:

Travis Company's records show that overhead was overapplied by $10,600 last year. The company has discovered that reason for overapplied overhead is an amount of $6,400 of depreciation on factory equipment was charged to administrative expense in error.

This transaction is a compensatory nature of error. Which wil have no impact on operating income of the company, Because administrating expense and depriciation expense both are expenses and part of operating income statement.

So correct answer is Option B.

Under the circumstances posed above, the error in recording depreciation would have no effect on operating income for the year.

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