On January 1, Scion Co. purchased land with a usable building on it for $210,000. The appropriate cost of the land and building were $70,000 and $140,000, respectively. Scion erroneously assigned the entire purchase cost of $210,000 to land. Scion should depreciate the building using the straight-line method over 20 years with an expected zero salvage value. As a result of Scion's treatment of the purchase of land and building, its current net income is:

Question

Quizplus · Accepted Answer

Since Scion assigned the entire purchase cost of $210,000 to land, they did not recognize the cost of the building, which should have been $140,000. Thus, their current net income is overstated by the amount of depreciation that should have been recognized on the building, which is $7,000 per year ($140,000/20 years). Therefore, the current net income is overstated by $7,000.