Error in Purchases Account Overstates Profit

Steps:

• Plant and machinery purchase of $20,000 was wrongly credited to purchases, reducing reported purchases by$20,000.
• Lower purchases decrease cost of goods sold by $20,000, overstating draft profit by$20,000.
• Draft profit of $30,000 reflects this overstatement.
• Correction adds $20,000 back to purchases, reducing profit by$20,000 to get revised profit of $10,000.

Why B is correct:

• Per accounting principles, crediting purchases erroneously reduces expenses; reversal increases expenses by $20,000, yielding$30,000 - $20,000 =$10,000 profit.

Why the others are wrong:

• A: Incorrectly adjusts by only $10,000 instead of full$20,000 overstatement.
• C: Wrongly adds to draft profit, ignoring the overstatement effect.
• D: Misapplies adjustment, perhaps subtracting $23,000 erroneously.

Final answer: B