What is the effect on the 2019 financial statements when a capital expenditure during 2019 was incorrectly recorded as a repairs and maintenance expense?
A)The financial statements are not affected.
B)Assets and net income are both overstated.
C)Assets are overstated and net income was understated.
D)Assets and stockholders' equity are both understated.

Question

Quizplus · Accepted Answer

When a capital expenditure is incorrectly recorded as a repairs and maintenance expense, it leads to an understatement of assets (because the expenditure should have been capitalized and added to the asset's value) and an understatement of stockholders' equity (because net income is reduced due to the higher expense, which in turn reduces retained earnings, a component of stockholders' equity).

What Is the Effect on the 2019 Financial Statements When