Magic Corp.purchased new equipment during the year but neglected to record depreciation.What is the effect of this omission on each of the named accounts?
$\begin{array}{ccc}
\text { Accumulated } & \text { Retained } & \text { Depreciation } \
\text { Depreciation } & \text { Earnings } & \text { Expense }
\end{array}$
A)$\text { Understated } \quad \text { Overstated} \quad \text { Understated }$
B)$\text { Understated } \quad \text { No effect } \quad \text { Overstated }$
C)$\text { Overstated} \quad \text { Understated } \quad \text {Understated }$
D)$\text { Overstated } \quad \text { No effect } \quad \text { Overstated }$
E)$\text { Overstated } \quad \text { Understated } \quad \text { Overstated }$

Question

Magic Corp.purchased new equipment during the year but neglected to record depreciation.What is the effect of this omission on each of the named accounts?
$\begin{array}{ccc}
\text { Accumulated } & \text { Retained } & \text { Depreciation } \
\text { Depreciation } & \text { Earnings } & \text { Expense }
\end{array}$
A)$\text { Understated } \quad \text { Overstated} \quad \text {  Understated }$
B)$\text { Understated } \quad \text { No effect } \quad \text { Overstated }$
C)$\text { Overstated} \quad \text { Understated } \quad \text {Understated }$
D)$\text { Overstated } \quad \text { No effect } \quad \text { Overstated }$
E)$\text { Overstated } \quad \text { Understated } \quad \text { Overstated }$

Quizplus · Accepted Answer

Failing to record depreciation results in Accumulated Depreciation being understated because the depreciation expense that should have been recorded wasn't, leading to a lower total in the Accumulated Depreciation account. Retained Earnings would be overstated because expenses reduce net income, and lower expenses mean higher net income than should be, thus increasing Retained Earnings more than it should be. Depreciation Expense would be understated because it was not recorded at all.

Magic Corp A) Understated Overstated Understated \text { Understated } \quad \text { Overstated} \quad \text { Understated } Understated Overstated Understated

Magic Corp A) $\text { Understated } \quad \text { Overstated} \quad \text { Understated }$