Misclassification of equipment sale as sales revenue

Steps:

• Correct entry: Debit cash $250, credit equipment$200, credit gain on disposal $50; gain increases profit by$50 but not gross profit.
• Error: Debit cash $250, credit sales$250; sales overstated by $250, boosting gross profit by$250, but no gain recorded and asset not removed.
• Gross profit effect: Overstated by $250, as sale of equipment is not revenue from operations.
• Overall profit effect: Overstated by $200 ($250 sales increase minus missing $50 gain).

Why the correct option is correct:

• Gross profit (sales - COGS) excludes non-operating gains; error inflates sales by full proceeds, while total profit nets the unrecorded gain per accounting standards (IAS 16 for disposals).

Why the others are wrong:

• A: Understates overstatement of profit by ignoring full sales inflation net of gain.
• B: Fails to adjust profit for missing gain on disposal.
• D: Reverses direction; error increases, not decreases, profits.

Final answer: C