Fitness Depot purchased a building on a tract of land and allocated the entire cost of the purchase to building. Normally the company depreciates buildings over 40 years using the straight-line method with zero residual value and does not depreciate land. Because of the improper accounting treatment of the purchase, the company's income for the next 20 years will be
A)overstated.
B)understated.
C)unaffected.
D)cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

Since the cost of the land has been incorrectly allocated to the building, the depreciation expenses for the building will be overstated, resulting in an understatement of the company's net income for the next 20 years.

Fitness Depot Purchased a Building on a Tract of Land