In periods of inflation, accounting depreciation is __________ relative to replacement cost, and real economic income is ________.
A)overstated; overstated
B)overstated; understated
C)understated; overstated
D)understated; understated

Question

Quizplus · Accepted Answer

In periods of inflation, the accounting depreciation is typically based on historical cost, which becomes understated relative to replacement cost. Real economic income also becomes overstated because the assets are worth more than their recorded value. Therefore, the correct answer is C, as understated accounting depreciation will lead to overstated economic income.

In Periods of Inflation, Accounting Depreciation Is __________ Relative to Replacement