If a machine with a 5-year life had been expensed rather than capitalized upon purchase in 2007, detection of this error would cause the Machine account and Retained Earnings to increase by the same amount.

Question

Quizplus · Accepted Answer

Capitalizing a machine (rather than expensing it) spreads its cost over its useful life, affecting depreciation expense, net income, and consequently retained earnings annually. Correcting this error would adjust the Machine account by adding the machine's cost (less any accumulated depreciation) and increase Retained Earnings, but not necessarily by the same amount due to the impact of yearly depreciation on net income and thus on retained earnings over the years.

If a Machine with a 5-Year Life Had Been Expensed