Question

A major addition to equipment should have been capitalized in the year 2018 but was incorrectly...

A major addition to equipment should have been capitalized in the year 2018 but was incorrectly expensed. Which of the following is (are) true?

a) Income in 2018 is understated.

b) Income in future years is overstated.

c) Assets in 2018 are understated.

d) All of these answer choices are true.

Business   Accounting   
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Answer #1

Correct option: d) All of these answer choices are true.

Because the entire cost of the equipment is charged against the revenues of 2018, income in 2018 is understated. Ideally, only the depreciation expense pertaining to the asset should have been recognized.

Because the entire amount is capitalized in 2018, there is no depreciation expense for the equipment in future years. As a result, income in future years is overstated.

Because the equipment was not capitalized, it did not get into the balance sheet. As a result, total assets are understated.

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