Fitness Depot purchased a building on a tract of land and allocated the entire cost of the purchase to building.Normally the company depreciates buildings over 40 years using the straight-line method with zero residual value and does not depreciate land.What is the impact of the improper accounting treatment of the purchase on the company's income for the next 20 years?

Question

Quizplus · Accepted Answer

By allocating the entire cost of the purchase to the building and not depreciating the land, Fitness Depot is overstating the depreciable base and therefore, overstating total depreciation expense. This will result in lower net income, which is understated. Therefore, the correct answer is option B.

Fitness Depot Purchased a Building on a Tract of Land