A major addition to equipment should have been capitalized in the year 2018 but was incorrectly expensed. Which of the following is (are) true?
A) Income in 2018 is understated.
B) Income in future years is overstated.
C) Assets in 2018 are understated.
D) All of these answer choices are true.

Question

Quizplus · Accepted Answer

When a major addition to equipment that should have been capitalized is instead expensed, it leads to an understatement of income in the year of the error (2018) because expenses are higher than they should be. Future income is overstated because expenses that should have been recognized over time through depreciation are instead recognized all at once. Assets are also understated in 2018 because the addition to equipment was not added to the asset's book value.

A Major Addition to Equipment Should Have Been Capitalized in the Year